MNI BRIEF: ECB Data Dependency To Aid Correct Policy -De Cos

The European Central Bank’s data dependent approach will help avoid either “insufficient or excessive tightening,” Bank of Spain governor Pablo Hernandez de Cos said in a speech on Monday.

“I believe the market understands this well,” he said, noting that current rate pricing is signaling persistence, “as a lot of inertia is priced into the curve of forward rates”.

Monetary transmission in the current cycle is estimated to be “around twice that in the 2005 and 1999 hiking cycles” if the evolution of a standard Financial Condition Index based on six asset prices variables: stock exchange index, short and long-term interest rates, corporate and sovereign spreads, and the exchange rate.

The ECB should remain vigilant to the recent rise of energy prices as last year's rise showed “stronger indirect effects than the decreases registered this year,” increasing the persistence of inflationary pressures, de Cos said.