The latest forecast from the Governor of the Bank of Spain confirms a challenging period for borrowers with floating-rate mortgages. Pablo Hernández de Cos states that interest rates are likely to stay elevated for an extended duration, with the target of inflation near 2% guiding policy in the foreseeable future.
He delivered these remarks at the Barcelona headquarters of Fundación La Caixa, addressing the European economic landscape and monetary policy. The message is clear: additional increases in pricing will likely emerge at upcoming European Central Bank (ECB) meetings as policymakers adjust to evolving conditions.
The Governor emphasized that the delay in policy tightening will shape its impact over this year and into the next, noting that the peak effect is expected to occur in 2024. He also cautioned that future policy moves will hinge on incoming economic data within a context that remains uncertain.
slower transmission
De Cos described a shift in how monetary policy translates into the broader economy, noting that certain channels are likely to transmit more slowly than in past cycles. He pointed out that the last rate increase occurred two decades ago and that since then economic changes have altered the transmission mechanism. This period featured a long stretch of expansionary monetary policy and unconventional measures before the current tightening phase, which is expected to exert a tightening effect on financial conditions that could be unprecedented.
The Governor highlighted that the ECB has pursued a rapid pace of rate hikes, a path that may produce non-linear effects on economic activity. He also drew attention to slower repayment dynamics for retail deposits, explaining why yields on these deposits can exceed market rates during times of negative interest and ample liquidity.
June
Looking ahead to the ECB’s governing council meeting in June, Hernández de Cos outlined several sources of uncertainty that are likely to shape macroeconomic developments in the coming quarters. A key factor is the durability of household savings built up during the pandemic and the strength of demand as the economy recovers post-crisis. He also cited the war in Ukraine as a persistent source of risk, alongside concerns about potential new episodes of financial instability, such as the failures seen in recent banking events.
Finally, he warned that rolling back fiscal support measures intended to curb inflation could support activity in the near term, but such policies should be temporary and targeted to protect the most vulnerable households as prices stabilize. He urged prudence in timing and scope, underscoring that public assistance must be designed to exit smoothly and avoid propping up unsustainable demand.
Attribution: Source: Bank of Spain