The Governor Pablo Hernandez de Cos of the Bank of Spain spoke on Thursday about the current trajectory of monetary policy. He described an indicator suggesting that interest rates could rise from 1.25 percent to a range around 2.25 to 2.5 percent by March of next year. He noted that rates are expected to stay at that level through most of 2023 and 2024, while cautioning about the possibility of changes driven by the European Central Bank, of which the governing council member is part. He emphasized the need for a thorough economic analysis to guide citizenship and policymakers alike.
Speaking at the XXI Congress of the Spanish Confederation of Managers and Executives in Bilbao, the senior official underscored the uncertainty surrounding the ultimate level to which the euro area monetary authority will push the price of money. The explanation centers on very high uncertainty in inflation and economic developments, compounded by the war in Ukraine and its geopolitical repercussions.
Nevertheless, the Central Bank of Spain has used its own macroeconomic models and data to build an information set that points to the most likely path for rate hikes in line with the ECB, given the aim of returning inflation to the 2 percent target. The analysis presents a central value around 2.25 to 2.5 percent but also lays out alternative outcomes ranging from roughly 1.75 to 3 percent. The governor described this as a data dependent range that can shift as new information becomes available, while offering it as a useful tool for citizens to understand potential policy paths.
policy signals
The governor described the ECB as including both flexible and cautious interpretations within its mandate, taking into account the overall economic situation. He referenced the institution’s chief economist, Philip Lane, and noted the presence of diverse forecasts. The message sent to markets reflected the variable nature of estimates regarding how far interest rates could rise, while also signaling to analysts and the public the possibility of more rapid increases if inflation remains stubborn.
The ECB’s governing council is scheduled to meet four times before March to decide on monetary policy. If the Bank of Spain’s projection proves accurate, rate increases of about 100 to 125 basis points could occur across meetings in October, December, February and March. For context, recent movements included increases of 125 basis points, with 50 basis points in July and 75 basis points in September, marking a historic pace of tightening.
In the 2.25 to 2.5 percent range, monetary policy acts as a constraint on the economy rather than a purely neutral stance. This movement places rates above 1 to 2 percent, suggesting a policy that tightens financial conditions. Yet market forecasts still anticipate rates staying below 3 percent, which has guided the bank in communicating a measured stance to the economy. Analysts also anticipate a potential move toward a neutral level closer to 1.5 percent over time as inflation progresses.
balance sheet considerations
The forecast also assumes that the ECB will not begin shrinking its balance sheet prematurely, avoiding the abrupt reduction of assets acquired in recent years as debt matures. If the central bank starts to unwind its balance sheet earlier than markets expect, the impact could add to the tightening already in motion. The governor stressed that the same tightening can be achieved through different mechanisms and that a cautious approach may be warranted depending on evolving conditions.
He concluded with a commitment to supporting inflation containment without imposing unnecessary hardship on euro area citizens. Acknowledging the difficult times, he expressed confidence that the authorities would meet the challenges ahead and maintain a steady course toward price stability for the eurozone.