Pablo Hernández de Cos: Economic developments in the current inflationary setting and the economic policy response

Speech by Mr Pablo Hernández de Cos, Governor of the Bank of Spain, at the "Economy and Society" lecture series, organised by the Fundación la Caixa, Madrid, 26 September 2022.

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

Ladies and gentlemen, first allow me to thank Fundación la Caixa for inviting me to participate in this series of lectures entitled "Economy and Society", which has become a benchmark for in-depth analysis of current affairs.

Against the current backdrop of high inflation and considerable uncertainty over the economic outlook, tragically marked by Russia's invasion of Ukraine, the first part of my address will focus on describing the Banco de España's diagnosis of the economic situation and outlook. I will then analyse the monetary policy response of the European Central Bank (ECB) to this setting and some of its possible effects on the Spanish economy. Lastly, I would like to highlight the role that other economic policies can play in tackling the challenges we currently face.

1. The main determinants of the current economic outlook

Inflationary pressures are proving particularly high and persistent, causing significant drops in real income

Inflation has surged persistently worldwide, becoming one of the major determinants of economic developments. The reasons behind the rise in inflation are manifold and combine supply and demand-side factors, whose weights differ depending on the geographical area in question. These factors include high commodity prices on international markets, production bottlenecks affecting certain goods (due to supply-demand mismatches triggered by the lifting of pandemic restrictions) and shipping bottlenecks. Lifting the health restrictions has also resulted in some of the demand for services being released, prompting an acceleration in recreation, hospitality and tourism prices. In addition, changes in practices, such as the rise of working from home, have led to higher spending on household appliances, exerting further pressure on their prices.