MNI BRIEF: Bank Of Spain Sees ECB Hiking To Restrictive Levels

Bank of Spain models see the European Central Bank raising rates to a peak of 2.25%-2,5% by March 2023, Governor Pablo Hernandez de Cos said in a speech in Bilbao on Thursday.

This would be higher than the neutral rate, but lower than market expectations, said de Cos, acknowledging that reaching that level would mean that the ECB would need to enter restrictive territory to bring inflation to 2% at the end in 2024.

The governor stressed that “nobody knows where the terminal rate is exactly,” due to high uncertainty and geopolitical risks. He pointed out that national bank models do not capture the risks of second round effects or of a de-anchoring of inflation expectations. (See MNI INTERVIEW: ECB Could Hike Past February - Kazaks)

The estimated terminal rate was calculated on the assumption that the ECB will maintain its balance sheet at its current size, with reinvestments under its Pandemic Emergency Purchase programme running until the end of 2024. A reduction of the balance sheet would mean a lower terminal rate.