Pablo Hernández de Cos, the Governor of the Bank of Spain, notes that the European Central Bank will continue to raise interest rates at a steady pace in upcoming meetings. The goal is to maintain rates high enough to be restrictive and keep inflation on a clear downward track toward the 2 percent target set for the medium term. De Cos emphasizes that only by holding restrictive levels can demand soften, inflation ease, and financial stability be safeguarded. His remarks at the 13th Spanish Investors Day Forum align with the ECB President Christine Lagarde, who has signaled a commitment to sustaining rate increases at a regular cadence.
In the last monetary policy meeting held in December 2022, the central bank increased rates by 50 basis points to 2.5 percent. Inflation in the euro area reached 9.2 percent after staying above 10 percent in the two preceding months. Core inflation stood at 5.2 percent, marking a record level for the region and slightly higher than November. The Bank of Spain chief states that the expected inflation reduction will be gradual and is projected to be 3.4 percent in 2024, versus 2.3 percent expected in September, and 2.3 percent in 2025. In both scenarios, inflation remains above the ECBs 2 percent target in the medium term, suggesting that rate hikes may continue through at least 2025 if forecasts hold.
Several factors drive this outlook, including a sharp rise in energy prices and ongoing supply chain disruptions observed at the end of 2021 and 2022. The war in Ukraine, which began in March, adds further pressure. Demand dynamics linked to the reopening of the global economy after pandemic restrictions also contribute, complicating the path for inflation. Analysts estimate that about 75 percent of the inflation rise in 2022 came from direct and indirect energy and food price effects.
According to ECB inflation projections, much of the higher production costs are passed on to final prices, though this transmission is imperfect. There is a risk that the inflation rate could pick up again later in the medium term if wage growth accelerates or inflation expectations remain anchored above target. A decline in energy costs or a softer demand environment could relieve inflationary pressures, a trend observed since the end of last year.
End of the stimulus program
De Cos also clarified the trajectory of the ECBs stimulus framework. The Eurosystem will halt the reinvestment of principal for securities maturing under the Asset Purchase Programme from the start of March 2023. The process will proceed gradually, with monthly reinvestments reduced to about 15 billion euros through the second quarter. When this initial phase ends, roughly half of the APP portfolio principal will remain on balance, and February will bring detailed parameters on fully ending the stimulus, a pace that will be measured and predictable.
Additionally, the Bank of Spain head reaffirmed the ECBs prior stance. In March 2022 the ECB concluded net purchases under the Pandemic Emergency Purchase Programme PEPP and committed to reinvesting the principal of securities purchased that mature at least through the end of 2024.