ECB’s Tightening Path To Hinge On Inflation Outlook, De Cos Says
The cut off of Russian gas flows to the continent will likely lead to a more prolonged and intense inflation bout, said de Cos.
(Bloomberg) -- The pace and magnitude of monetary tightening by the European Central Bank will depend on its capacity to keep a lid on inflation expectations and reduce the spread of price increases beyond energy, said Governing Council member Pablo Hernandez de Cos.
The cut off of Russian gas flows to the continent will likely lead to a more prolonged and intense inflation bout that cannot be countered by a slowdown in activity only, said de Cos, who is also the head of the Bank of Spain.
“We will continue to normalize monetary policy, at a pace and magnitude that will depend on the materialization of risks to our medium-term inflation target,” De Cos said Monday in a speech in Almeria, Spain,
However, de Cos warned that monetary action should not focus only on short-term inflation given the lag in the impact that rising interest rates have on prices. He also said that the depth of the economic slowdown will be a key determinant in mid-term inflation expectations, and therefore in future monetary policy decisions.
“Our actions affect inflation very gradually, reaching their maximum impact after about two years,” De Cos said. Even if the impact were more immediate, “it may not be desirable to force an excessively rapid convergence of inflation to 2%, due to the excessive impact on activity and employment that this would entail.”
It’s the first time de Cos, considered one of the ECB’s most dovish officials, has spoken since this month’s historic three-quarter-point hike, which he said was justified by the inflation outlook. That move matched the recent tough action taken by the Federal Reserve and highlighted how the hawks in Frankfurt currently dominate the battle to curb inflation.
The main risks to bringing inflation back to the ECB’s 2% target are the de-anchoring of inflation expectations and the materialization of second-round effects, de Cos said. He added that the monetary normalization is already lifting market rates that should help contain price pressures.
The weekend saw Bundesbank chief Joachim Nagel urge officials to be “determined” in implementing more rate hikes as price gains approach double digits -- even if doing so drags down economic expansion.
Earlier Monday, ECB Vice President Luis de Guindos said a slowdown in Europe’s growth isn’t enough on its own to curb consumer prices.
(Adds new de Cos comments)
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