MADRID (Reuters) – The European Central Bank should start cutting interest rates in June if inflation continues its gradual decline as expected, European Central Bank policymaker Pablo Hernandez de Cos said on Tuesday.
Inflation has fallen quickly over the past year but the outlook further out remains clouded by rising energy costs, stubbornly high services inflation and continued geopolitical tensions. De Cos said that inflation was expected to continue declining in the coming quarters, although at a slower pace than last year due to some upward base effects.
“The ECB’s governing council considers that if this inflation outlook is maintained, it would be appropriate to start reducing the current level of monetary policy tightening in June,” De Cos, who is also head of the Spanish central bank, said in the Bank of Spain’s annual report.
Given the level of uncertainty, he said the ECB would continue to follow a data-dependent approach where decisions are taken at each meeting, without pre-committing to a specific rate path.
Regarding Spanish lenders, De Cos said the Bank of Spain was considering setting a “positive level” for banks’ countercyclical capital buffer, now at 0%, and would announce its decision whether to activate it soon.
The buffer seeks to mitigate or prevent cyclical risks caused by excessive growth in aggregate credit by requiring lenders to build insurance reserves during times of strong growth which would then be available in the case of a downturn.
