Bank of Spain Leader Signals Steady Rate Hikes as Inflation Cools

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The Governor of the Bank of Spain, Pablo Hernández de Cos, and his ECB colleagues continue signaling that interest rates will rise at a measured, steady pace until inflation trends toward the 2% target. The objective remains to push policy into a sufficiently restrictive zone to anchor price growth, with the medium-term outlook framed around gradual disinflation. De Cos’s remarks at the 13th Spanish Investors Day aligned with the ECB presidency’s commitment to ongoing rate increases at a constant pace, reinforcing a shared narrative about monetary restraint across the euro area.

In December 2022, the last policy meeting saw a 50 basis-point hike, lifting the policy rate to 2.5%. Inflation across the euro area hovered near 9.2%, after briefly surpassing 10% in the preceding two months. Core inflation stood at 5.2%, marking a multi-year high for the region. De Cos highlighted that inflation would likely decline gradually, projecting about 3.4% in 2024, compared with around 2.3% expected in September and 2.3% in 2025. He emphasized that inflation would remain above the ECB target for the medium term, implying that rate increases could extend through 2025 if forecasts hold true.

The path of inflation rests on multiple drivers. Elevations in energy and food prices have contributed to the inflation spike, with subsequent disruptions to supply chains linked to the 2021–2022 period and the economic shock from the Ukraine conflict beginning in early 2022. As demand rebounds with the global economy reopening after the pandemic, these dynamics, along with a weaker euro, compound price pressures. Estimates suggest that roughly three-quarters of the 2022 inflation rise can be traced to higher energy and food costs.

ECB forecasts indicate that much of the accumulated rise in production costs has been passed through to consumer prices, though this transmission remains imperfect. There is a risk that inflation could move higher again in the medium term if wage growth accelerates or if inflation expectations become more persistent above the 2% goal. The combination of energy costs, domestic demand, and external price movements continues to influence the policy stance in the euro area, reinforcing the likelihood that rate increases will persist for some time if the outlook does not improve decisively.

End of incentive plan

End of ECB stimulus adjustments: the Eurosystem will progressively stop reinvesting the principal of securities that mature under the APP asset purchase program, beginning from March. The tapering will occur in gradual steps, with a plan to reduce purchases by 15,000 million euros per month through the end of the second quarter. By that stage, roughly half of the APP portfolio’s principal will remain, with February set to reveal more detailed parameters for a complete, measured wind-down of stimulus, ensuring the pace remains observable and predictable.

On the other hand, De Cos reaffirmed the ECB’s stance on pandemic-era measures. The ECB ended net purchases under the Pandemic Emergency Purchase Programme in March 2022, and will reinvest the principal of securities that mature at least through the end of 2024.

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