Stournaras intervention on interest rates – Shows 50% hikes from ECB

Stournaras intervention on interest rates – Shows 50% hikes from ECB
Stournaras intervention on interest rates – Shows 50% hikes from ECB

PiThe Greek central banker and member of the ECB’s Board of Directors, Yiannis Stournaras, seems to favor a holistic steady hand, as can be seen from his intervention at the European Forum Alpbach (EFA) 2022 in Austria, arguing in favor of the progressive normalization of interest rates.

In his intervention, Yiannis Stournaras – who also votes in September in the Council – after sketching the picture of the prevailing situation in the economy, advocated the progressive normalization of interest rates, so that they converge towards the estimated equilibrium interest rates.

Consolidating the shift in the ECB Board’s estimates, the central banker underlined that inflation comes from supply, as is the case in the US. Also, Yiannis Stournaras described the phenomenon as “Lernaia Hydra” and reiterated the strong commitment to deal with it.

Reference to the setting of interest rates, he himself put all the required asterisks so as not to appear to be prescribing the decision, saying that decisions are made on a meeting-by-session basis, thus making it clear that there are no policy decisions made and that these are determined by incoming data and the assessment of risks.

At the points of his intervention, however, Yiannis Stournaras typically mentions that

(…)the appropriate monetary policy response is, in my view, to smooth out successive supply shocks,

while continuing to specialize:

gradual but decisive normalization of policy, which preserves choice depending on circumstances and incorporates flexibility.

In fact, in order to prove his claim, he states that:

I believe that the gradual normalization approach we have followed is successful and should be continued.

These remarks, on the part of Yiannis Stournaras, seem to describe the attitude that he intends to maintain within the board of directors. Traditionally, Yiannis Stournaras has sided with Christine Lagarde in the Council, voting on her proposals and often participating in the close preparation group.

Hermeneutically, the Greek central banker appears to be favoring a resolve that is attributed to strong, higher-than-usual rate hikes, consistent and repeated. This positioning seems to spell out the scenario for a series of 50 basis point hikes in ECB interest rates.

The road to normalization

The ECB clarifies, in the minutes of the extraordinary meeting of July, that the increase in interest rates by 0.5%, while it had announced two increases of 0.25%, is the first -independent step- and marks the end of the era of zero interest rates. Now, Yiannis Stournaras adds that:

In a historic decision in July, which marked the end of an eight-year period of negative interest rates in the euro area, my colleagues on today’s panel and the rest of the Governing Council together raised key interest rates by 50 basis points.

The increase was larger than announced at the June monetary policy meeting because we judged that, in the intervening period since June, risks to the inflation outlook had already materialized.

Eyes on the ball

Of particular interest, however, is the highlighting of the index of medium-term inflation expectations, which Yiannis Stournaras underlined that the ECB closely monitors.

In this challenging environment, we are closely monitoring medium-term inflation expectations, which throughout the inflationary storm have remained close to our target, i.e. close to 2%.

This note, and indeed in the concluding remarks, tends to highlight the issue that while short-term inflation is a problem, in the medium term the situation remains under control and therefore “shock and awe” interventions are not required.

Disorders and the Lernaean Hydra

He predicted that supply-side disruptions and war-related disruptions are likely to continue. But the slowdown in demand will help lower inflation. “The Board should continue to carefully monitor all factors. A gradual, in successive steps, approach is considered appropriate, given that there is a lot of uncertainty and that inflation comes from the supply side” underlined the governor of the Bank of Greece.

Regarding the further course of inflation, he estimated that the successive jumps of inflation to ever higher levels will soon start to stop, arguing that its stable de-escalation is imminent. According to the most recent Eurosystem expert projections (published in June) cited by the ECB governor, inflation is expected to peak before the end of the year, decline gradually in 2023 and converge towards the target in 2024.

The brakes of the ECB

Among other things, the governor of the Bank of Greece recalled the decision taken by the ECB in July in order to prevent the risk of the fragmentation of monetary policy – which concerns the excessive increase in borrowing costs for the states of the European South – by adopting the instrument for transmission protection instrument (TPI).

The article is in Greek

Tags: Stournaras intervention interest rates Shows hikes ECB

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