The governor of the Bank of Spain, Pablo Hernandez de Cos, pointed to a notable shift unfolding this Wednesday. An inflation-fighting push accelerated by the European Central Bank began last July and continues to drive the market as it moves toward policy tightening. Investors expect two more rate hikes of 0.25 percentage points in June and July, pushing the main rate to 4.25 percent, a level not seen since July 2008. The deposit facility rate, which is the interest banks earn when they park funds at the central bank, is anticipated to rise to 3.75 percent, making this development especially consequential in the current climate.
Money-market data show the euribor for a 12 month horizon climbing to around 3.7 to 3.8 percent since mid-April, aligning with the level the market has priced into official rates. The central banker noted this trend at several IESE banking conferences, underscoring that the path of money costs will depend on inflation evolving in the required direction. If inflation cools, the anticipated gradual tightening will stay on track; if not, further increases could be warranted.
The governor’s message is best understood within a broader debate inside the ECB about its mandate. On one side are those advocating a flexible, broad interpretation that weighs current economic conditions to avoid unnecessary restraint. On the other side are the hawks who emphasize strict adherence to price stabilization goals. Hernandez de Cos has spent months publicly signaling cautious, measured tightening in contrast to some national central bank peers who favored more aggressive action.
Additionally, Hernandez de Cos estimates that a government-imposed tax on banks will likely trim banks’ profits by around 5 percent in 2022. He argues that Spanish banks remain resilient and well capitalized, aided by a decade of regulatory reforms that have strengthened liquidity and solvency. Yet institutions are also seeking to capitalize on any short-term profit gains from rate increases, while still facing the ongoing need to reinforce balance sheets and maintain prudent risk management.