ECB’s Stournaras: Exit Will Mostly Depend on Evolution of Inflation

30 July 2020

By David Barwick – FRANKFURT (EconoStream) – The European Central Bank’s unwinding of its ultra-loose policy stance will be driven chiefly by inflation developments, ECB Governing Council member Yannis Stournaras said Wednesday.

In an interview with Bloomberg TV, Stournaras, who heads the Bank of Greece, said, ‘We have an exit strategy, and that will depend on the evolution of inflation, mostly.’

Stournaras confirmed that the economy had hit bottom in April and then given way to a ‘slight recovery, at least in the sentiment and in certain soft indicators.’

‘So we can say that in Europe we have the first signs of recovery. Still, the risks are on the downside’, he said. Developments remain consistent with the ECB’s baseline scenario, he said, given which the ECB remains likely to exhaust the entire €1.35 trillion allocated to its pandemic emergency purchase programme (PEPP).

‘… we don’t have any evidence yet that this [envelope] will not be exhausted’, he said. The ECB is data-driven, and ‘we are not outside the baseline scenario.’

A conclusion that the PEPP would need to be stocked up yet again would require ‘data on inflation and economic activity, mostly, but also on financial markets’, he said.

As to whether the ECB would extend into next year its repudiation of bank stock dividends, Stournaras said this would depend on where things stand with respect to the pandemic. ‘Still, the risks are on the downside, so let’s wait and see’, he added.

The ECB on Tuesday issued a statement saying that it ‘extended its recommendation to banks on dividend distributions and share buy-backs until 1 January 2021 and asked banks to be extremely moderate with regard to variable remuneration.’

Asked if he was worried about a resurgence of the pandemic, Stournaras replied, ‘Maybe, yes.’ Noting the number of new cases worldwide, he said that ‘perhaps we are in a second round already in certain areas of the world.’

The €750 billion recovery fund agreed by European leaders earlier in the month ‘is good for monetary policy because it makes the policy mix more balanced,’ he said. ‘So now we have fiscal policy, both on the national sides, but also at the European level, which is very positive.’ The fund would hopefully ‘become permanent at some point’, he added.