Spain will grow one point less this year and 1.2 next year due to the ECB's rate hike

The increase in interest rates undertaken by the European Central Bank will have a direct impact on the growth of the Spanish economy, so that the Gross Domestic Product (GDP) will grow 1 point less this year (about 13,000 million euros) and 1 .2 points less the next one (around 15,000 million), according to calculations by the Bank of Spain, which predicts an advance of 2.3% and 1.8% respectively for these years.

“According to the Quarterly Model of the Bank of Spain (…) the tightening of monetary policy would reduce GDP growth by 1 percentage point in 2023 and 1.2 percentage points in 2024, before reducing to 0.3 percentage points in 2025. As usual, these estimates are subject to high uncertainty,” the supervisor said in a statement this Thursday..

The institution governed by Pablo Hernández de Cos calculates that the increase in interest rates of 4.5 points (from 0% to 4.5%) that the ECB has carried out in the last two years has a full impact on economic growth due to its effect on the consumption of households – which have less money to spend as their debts increase (for example, mortgage payments) and who decide to ask for less credit – and on companies – whose debts also become more expensive and that detract from your investment.

The slowdown in consumption and investment translates into lower economic growth, although the Bank of Spain explains that there is a certain “delay” between when a monetary policy decision is made and until it has an impact on behavior. of economic agents, hence we also have to wait from when rates are raised until inflation is corrected.

For this reason, although half of the rate increase occurred in 2022, last year the impact on GDP was only 0.6 percentage points. “Given the considerable delays between monetary policy actions and their effect on activity, the maximum impact is expected to materialize starting this year,” they maintain.

These estimates have been made based on the model used by the Bank of Spain, which assumes that an increase of 1 point in interest rates has an impact on GDP of just under four tenths.. However, the supervisor specified in its Quarterly Report on the Spanish Economy that there were two other models that estimated an impact of up to -1.1 points of GDP for each point that interest rates rise.. According to the latter, the negative impact on growth would have been much higher.

The Bank of Spain recalls that this forecast is made assuming “a counterfactual scenario in which the different channels described in the Annual Report exercise (intertemporal substitution, income, wealth, exchange rate, trade) operate in accordance with the empirical regularities that have been observed historically and there are no additional disturbances in any other aspect that condition the behavior of the economy.