The rise in interest rates is nearing its peak, yet a swift decline remains unlikely. Pablo Hernández de Cos, governor of the Bank of Spain, spoke at a Cercle Financer conference in Barcelona about keeping borrowing costs in a narrow band for an extended period in order to reach a sustainable 2% inflation target over the medium term.
During the event, he was accompanied by Isidre Fainé, the president of Fundació La Caixa. Describing him as one of the country’s most brilliant economists, Hernández de Cos admitted that monetary policy has a long road ahead. He emphasized that preserving price stability is the central bank’s most significant contribution to ensuring durable, strong economic growth. Before Fainé’s speech, Gonzalo Gortázar praised Hernández de Cos as a key figure known for his political independence in supervising the financial system not only in Spain but also across Europe.
most optimistic scenario
Hernández de Cos acknowledged that there is still a long way to go after the 25 basis point rise in the policy rate earlier this month. He noted that the 2023 scenario looks a bit more optimistic and suggested that the inflation peak may be behind the economy. The Bank of Spain recently projected growth around 2% for 2023, aligning with the 2.1% cited in the Government’s 2023-2026 stabilization plan update to Brussels. Market expectations, according to his remarks, point to the deposit facility reaching 3.75% from the current 3.25% based on March forecasts.
Nevertheless, the governor stayed cautious, highlighting unresolved uncertainty and the resilience of the eurozone economy. He pointed to global developments such as the trajectory of the world economy, the recovery in China, and episodes of financial instability in the United States and Europe, noting that these factors have so far had a limited impact on Spain’s path.
The European Central Bank (ECB) will calibrate its decisions as new data arrive, recognizing that monetary tightening has begun to bite. Access to credit has become more challenging, with lending and credit flows slowing while retail deposits are affected by what he called excess liquidity in the market.
Core inflation
Inflation, the governor explained, has fallen from the peak reached in November 2022 due to lower energy prices, improvements in supply chains, and softer demand. The most core measure, which excludes volatile energy and unprocessed food, remains under persistent pressure. Wage dynamics also matter: in the last quarter, wages per employee and per hour rose by about 5% and 4.3% respectively, compared with 3.9% and 2.9% in the previous quarter. In some cases in Germany, wage growth reached around 6%. Although other indicators based on company-level data show more moderate trends, certain sectors exhibit stronger margin expansion.