Ex-Bank of Greece’s Mourmouras: ECB May Have to Act Again Soon

15 December 2020

By David Barwick – FRANKFURT (Econostream) – The appreciation of the euro may compel the European Central Bank to make a standard monetary policy move by cutting the deposit facility rate in as little as three months, former Eurosystem official John Mourmouras told Econostream on Friday.

Mourmouras served from 2015 until a few weeks ago as Senior Deputy Governor of the Bank of Greece, where he chaired the Financial Asset Management and Risk Management Committees. He was Deputy Finance Minister under Greek Prime Minister Lucas Papademos from 2011 to 2012 and now heads Interbanking Systems SA, a subsidiary of the central bank that facilitates domestic and cross-border electronic interbank payments.

In any event, he said, a further policy recalibration like that of Thursday would probably come in June of next year as the pandemic continues to make the recovery a ‘bumpy road’ and to threaten the favourability of financial conditions.

‘If the ECB wants to do something about the inflation objective, then they may want to make another cut in the deposit rate facility’, he said. Although ‘the politics are difficult’ when it comes to such a move, given public scepticism and likely opposition from core Eurozone central banks, ‘I see a situation where members of the Governing Council may be forced to cross that bridge’, he said.

‘What I have in mind is a stronger euro’, he elaborated. ‘The arguments are there for a weak dollar, and I see a window there for a decrease in the interest rate to try and weaken the euro. And that window could be next March.’

Many observers agree that the ECB’s failure to over-deliver last Thursday has set the stage for a continued appreciation of the common currency. In its post-ECB announcement analysis, German bank ING-DiBa called the Eurotower’s new measures ‘not strong enough to outweigh the strong bearish USD dynamics in place’, implying ‘more upside to EUR/USD’. ECB Executive Board member Fabio Panetta warned on Monday that 'an appreciation of the euro could significantly affect euro area inflation.'

Indeed, the tightening of financial conditions that motivated the new measures already had much to do with the strength of the euro, ‘so yesterday’s recalibration was basically a reaction to the appreciation’, Mourmouras said. ‘I wouldn’t call the decision more accommodative monetary policy. For that I need to see a higher rate of purchases, a bigger envelope and a cut in the deposit facility rate.’

Despite the progress towards a medical resolution of the pandemic and the agreement on the EU recovery fund, the environment remains very uncertain and a further wave of Covid-19 could easily occur before herd immunity is reached, he said. ‘The ECB’s possibilities are unlimited, so I would expect another recalibration’ in June 2021 that extends the horizon of asset purchases and boosts the envelope accordingly, he said.

This, he made clear, was independent of ‘possible moves linked to the strategy review’, the results of which - due in the second half of next year - would probably imply changes.

Still, he said, expectations of another recalibration did not mean the economic recovery would not resume. ‘The vaccines will support consumption, the EU recovery fund will support investment and exports are doing not badly’, he summed up. ‘So, we can expect a rebound next year, that’s clear.’

And while there should be ‘no doubt’ that the ECB always has the wherewithal to provide additional support if needed, ‘there are decreasing returns to monetary policy, even to unconventional monetary policy,’ he said.

‘Reaching the inflation target depends on fiscal policy’, he said, which is why monetary authorities are so insistent about the importance that fiscal policy do its part.

‘It is no coincidence that the ECB is enthusiastic about the pan-European fiscal support via the recovery fund’, he said. ‘Very few at the ECB would disagree that amid the pandemic crisis, money from the fund that goes directly to targeted, productive public spending, together with growth-enhancing structural reforms, would contribute significantly to a return to normality and thus to higher inflation, which, after all, is the ultimate objective of the ECB.’