The Bank of Spain warns that without “financial stability” there is no “price stability”

Bank of Spain Governor Pablo Hernández de Cos has warned that without “financial stability” there is no “price stability”. In an event organized by ‘Norte de Castilla’, he also highlighted that the tensions in the markets after the collapse of the Bank of Silicon Valley in the United States and the Swiss bank Credit Suisse are disinflationary, and that they will have to be taken into account in the next decisions of the European Central Bank (ECB) on interest rate hikes.

Banks must raise deposits to 2.5% to keep up with other cycles of high interest rates


“We must remember that, as we underlined in the review of the monetary policy strategy that we published in July 2021, financial stability is a prerequisite for price stability,” said Hernández de Cos. This position questions the aggressiveness of increases in the official ‘price’ of money to combat inflation.

The ECB’s board of directors, of which the Spanish governor is a member, decided on March 16 to raise interest rates by another 0.5 point, to 3.5%, despite the fact that this means increasing the risk of a banking crisis.

“This decision continues the path of tightening monetary policy that we started in December 2021 and which has so far resulted in an accumulated rise of 3.5 points in official interest rates since July 2022. [desde el 0%]”, summarized the governor this Monday.

Hernández de Cos added that this decision “is in line with what was anticipated in our February meeting and was supported by our assessment of the inflation outlook in the euro zone, which points to very high inflation for a long time”. However, in his speech, he qualified that the latest ECB projections were completed “a few days before the start of the recent financial turmoil”.

“This increased uncertainty reinforced the importance of a data-driven approach to our decisions. In this sense, these future movements will be determined by our assessment of the inflation prospects which, in turn, will depend on three developments”, he added.

“Firstly, by the new economic and financial data. Second, from the underlying inflation dynamics [excluye de su cálculo los precios de la energía]. And finally, the intensity of monetary policy transmission. And it is on this factor that the tensions in the financial markets that we have been experiencing in recent days can directly affect, generating an additional tightening of financial conditions and affecting, downwards, the prospects for economic activity and inflation. Events to register in our next meetings [del consejo de gobierno del BCE]”, detailed the governor of the Bank of Spain.

Fall in inflation due to power outage

With regard to inflation forecasts, he explained that “during 2023, the process of moderating price increases will continue to be driven by the energy component, taking into account the expected evolution of energy prices in the futures markets and the presence of important negative base effects associated with the behavior of these prices in 2022”. Of course, he lamented that “on the contrary, core inflation and food inflation should show greater bearish resistance”.

Regarding the banking sector in the euro zone and, within it, the Spanish one, he underlined that “it is well prepared to face severe adverse scenarios thanks to its high degree of resilience and solid capital and liquidity position”.

Although he warned that, “nevertheless, this episode highlights the need for our banks to carry out a prudent policy of provision and capital planning, which allows part of the increase in profits that occurs in the short term to further increase resilience of the sector”.

And he recalled that “in the heart of the ECB’s governing council we are closely monitoring the financial developments in question and, if there is a materialization of risks in the banking sector greater than what could be anticipated at the moment, the ECB and the national authorities are prepared to act as and when necessary to maintain financial stability in the euro area”.

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