Pablo Hernández de Cos: Monetary policy in the euro area - where do we stand?

Speech by Mr Pablo Hernández de Cos, Governor of the Bank of Spain, at the 15th International Forum of Sovereign Wealth Funds - COFIDES Annual Meeting, Madrid, 25 September 2023.  

The views expressed in this speech are those of the speaker and not the view of the BIS.

Central bank speech  | 
25 September 2023
by Pablo Hernández de Cos
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  |  9 pages

I would like to thank the organisers for inviting me to take part in this event and giving me the chance to share with you some reflections on euro area monetary policy in the current juncture.

In a context of very high and persistent inflation, the ECB Governing Council has taken decisive actions to ensure that inflation returns to our medium-term target of 2% in a timely manner.

  • The policy rate rise has been the biggest and swiftest in the history of the monetary union, taking the deposit facility rate up to 4% in our September meeting. Since July 2022, when we raised our interest rates for the first time in more than a decade, the cumulative ten consecutive increases in interest rates amount to 450 bp.
  • The speed of reduction of the balance sheet so far has been extraordinary, also in comparison with other central banks. Since TLTRO borrowing peaked at the end of 2021, the outstanding volume of TLTROs has fallen by €1.65 trillion. This is in addition to the decline in the asset purchase programme portfolio of almost €110 billion since reinvestments were ended in June.

In this context, let me focus today in detailing my assessment of the economic and inflation outlook, including in particular the dynamics of underlying inflation, and the strength of monetary policy transmission. I will then explain what may be expected from our monetary policy going forward.

The economic growth outlook

Economic activity in the euro area was very subdued in the first half of 2023. Real GDP grew by only 0.1% in Q2, as little as in the previous quarter and well below the June Eurosystem staff projections. The most recent economic indicators suggest that this weakness may have intensified during the summer months. The deceleration is broad based across sectors and countries, and it is starting to be reflected in employment indicators.