The Bank of Spain sees an improvement in GDP and inflation forecasts as "highly probable"

The governor of the Bank of Spain, Pablo Hernández de Cos, considers it "highly probable" that the institution's GDP growth forecasts for 2023 will be revised upwards in March, after appreciating a "greater-than-expected resilience of the European economies and Spanish" to the main uncertainties of the moment, which are "the invasion of Ukraine and inflation.

Thomas Osborne
Thomas Osborne
07 March 2023 Tuesday 04:27
19 Reads
The Bank of Spain sees an improvement in GDP and inflation forecasts as "highly probable"

The governor of the Bank of Spain, Pablo Hernández de Cos, considers it "highly probable" that the institution's GDP growth forecasts for 2023 will be revised upwards in March, after appreciating a "greater-than-expected resilience of the European economies and Spanish" to the main uncertainties of the moment, which are "the invasion of Ukraine and inflation.

Hernández de Cos launches this message despite describing economic uncertainty as "very high" and asking banks to increase prudence and dedicate part of the profits to "increasing their resilience." He has done so in a forum organized by Invertia and El Español in which he has also alluded to the real estate sector as one of those that may suffer the most difficulties.

"We believe that it is highly probable that the GDP growth forecasts for the Spanish economy for 2023 will be revised upwards in March compared to December, while those for inflation will be revised downwards, while the forecast that core inflation will be high in the short term and will only moderate gradually in the coming months," he said.

One of the factors that justify the foreseeable improvement in forecasts is the moderation in energy prices, especially gas. "The disturbance in energy prices has been significantly corrected" to the point that "today the price of gas is at levels below those at the start of the war."

Added to this circumstance are the "cushions" for family savings, the "government measures to cushion falls in income" and "the dynamism of the labor market", which sustain the economy at higher levels than predicted by the Bank of Spain.

However, the institution's message is one of caution in the face of "high risks", and in view of the fact that the effects of interest rate rises are still "not fully perceived", while "the consequences of the war They're still there."

"Prudence is necessary because the risks remain very high," warns de Cos. One of the factors that the Bank of Spain is now watching with interest are the possible second-round inflationary effects, which could force "a greater tightening of monetary policy", that is, new rises in interest rates. On March 12, the ECB meets to, foreseeably, adopt a decision in this regard.

The governor of the Bank of Spain has also warned of the "deceleration" of the real estate market due to the tightening of financing conditions, in view of the fact that the granting of mortgages is being reduced. However, house prices continue to rise, with increases of 7.6% last year.

He also found that the banks are not raising interest on deposits at the rate of loans due, according to what he said, "to an excess of liquidity" that will be reduced "progressively." If interest rates have been transferred between 46% and 59% to the cost of debt, the return on deposits only reflects the change in scenario for the moment by 15%.

Hernández de Cos has also demanded "prudence" from the banks in a context in which their profitability increases "significantly", but in which their solvency may also deteriorate. "At the Bank of Spain we think it is very important that entities build additional buffers that allow them to face unexpected situations without restricting the supply of credit to solvent projects", he stated.

The entities must, in the opinion of the governor of the Bank of Spain, adopt "prudent policies for planning provisions and capital that allow part of the short-term benefits to be allocated to further increase the resilience of the sector."