The Bank of Spain calculates that the increases in interest rates only lowered inflation by 2 tenths in 2022

The Bank of Spain calculates that the increases in interest rates barely lowered inflation by 2 tenths in 2022, which on average in Spain was 8.4%. According to the same exercise, the institution estimates that the impact of the tightening of the monetary policy of the European Central Bank (ECB) on economic growth was 6 decimals, despite the fact that the GDP (Gross Domestic Product) advanced by 5.5%.

The ECB moderates the aggressiveness of rate increases to 0.25 points, up to 3.75%, but warns of more increases

The ECB moderates the aggressiveness of rate increases to 0.25 points, up to 3.75%, but warns of more increases


In 2023 and 2024, it is projected that the ECB’s aggressive strategy will barely manage to moderate price rises by 5 or 6 tenths, as explained by the Governor of the Bank of Spain, Pablo Hernández de Cos, this Monday in the speech he gave at the La Caixa Financial Foundation, in Barcelona. For this year, the different forecasts of the analysis centers are around an average of 4% inflation in our country, mainly due to cheaper energy.

On the other hand, the impact of the increase in the cost of financing will be much greater for economic activity in general, both this year and the next. The increase in the official ‘price’ of money and the end of ECB debt purchases will subtract 1.1 points from growth in 2024, added Hernández de Cos.

“It is clear that the process of tightening monetary policy is having and will have costs in the short term in terms of lower economic activity, but that maintaining price stability is the greatest contribution that the central bank can make to guarantee growth solid economic growth in the long term”, he has had an impact.

An “unprecedented” blow

The ECB and the rest of the large central banks, with the exception of the Bank of Japan, are fighting inflation on two fronts: with increases in official interest rates (their most visible tool due to its impact on the rise in mortgage prices and other loans) and with the extinction of the purchases of public (state) and corporate (company) debt bonds in the markets, which is another way of increasing financing costs.

In his speech, Hernández de Cos himself acknowledged that “the intensity and pace of the ECB’s interest rate hikes are unprecedented [del 0% al 3,75% desde julio de 2022]which could generate non-linear effects in the economy”.

As he continued, “on this occasion the negative supply shocks are the ones that have prevailed [la escalada del petróleo o el gas por la invasión rusa de Ucrania, los cuellos de botella en el comercio mundial por la pandemia…] unlike what happened in previous cycles in which demand shocks dominated. This implies that the economy must face a tightening of financial conditions in a context of weak economic growth”. The GDP growth forecast for 2023 is around 2%, largely due to the intense growth in corporate profits, the deployment of the Recovery Plan, unknown employment stability, income protection measures (rises of pensions, the SMI, the IMV, a cap on gas, transport discounts…) and the good performance of exports.

In addition, all the supply disturbances referred to in governor have been nuanced in recent months. And monetary policy practically does not act on them, but depends on geopolitics, or other issues. Faced with this, Hernández de Cos has also highlighted the appreciation of the euro in recent times against the dollar, which is partly explained by the rise in interest rates and which automatically makes oil or gas cheaper, which are quoted in the US currency. in international markets.

But the ultimate goal of central banks is to stifle the economy in order to moderate price rises. In addition to deteriorating the consumption and saving capacity of families and making it difficult for states to borrow to increase public spending, they damage the margin of companies to invest, grow and, therefore, to create jobs.

The institutions that direct monetary policy assume the risk of causing an economic recession, because under the analysis of monetary policy, inflation for a long time is more dangerous than a period of falling activity and rising unemployment. Central banks have repeatedly admitted that they do not have other less painful tools to contain prices, but doubts about this approach are multiplying.

“Looking ahead, the process of tightening our monetary policy is already well advanced, although, with the information we currently have, we still have some way to go,” Hernández de Cos stated on Monday. In June, the ECB is expected to raise the ‘price’ of money again.

“We also anticipate that interest rates will have to remain in tight territory for a long time to reach our target. [el 2% de inflación] in a sustained manner over time. In any case, in a context of as much uncertainty as the current one, we continue to stress that future decisions will continue to depend on the data”, the governor concluded.

Source: – by

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