Ex-Bank of Greece’s Mourmouras: ECB’s Strategy Review Won’t Imitate Fed’s

16 December 2020

By David Barwick – FRANKFURT (Econostream) – The European Central Bank’s strategy review is likely to yield a dovish outcome but without duplicating the example of the U.S. Federal Reserve, 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.

‘I maintain that the ECB is not going to follow in the Fed’s footsteps on average inflation targeting’, he said. Under a regime of average inflation targeting, when HICP eventually goes above the ECB’s current target of below but close to 2% over the medium term, policy would remain looser than it otherwise would so as to compensate for the period of below-target inflation, he reminded. ‘I can’t see the hawks on the Governing Council ever accepting inflation above 2% with no action’, he said.

‘My view is there will be modifications to the existing inflation targeting framework, but that the ECB will stick to an inflation targeting framework well removed from the average inflation target framework that the Fed has adopted, or even a price level targeting framework’, he said.

Still, against the backdrop of the pandemic, the ‘lowflation’ of recent years and – not least – the Fed’s own choice, the review will lead in ‘a dovish direction for the ECB also, meaning an even longer period of low interest rates’, he said.

Mourmouras predicted the ECB would remove ‘below but close to’ from its present definition of price stability, fulfilling expectations of a more symmetric target that would ‘signal to the relevant stakeholders that the cost of undershooting is equivalent to that of overshooting’ and help anchor higher inflation expectations. The figure of 2% is generally accepted and would remain, he said.

While the ECB cannot change its mandate, this being established by Article 127 (1) of the Treaty on the Functioning of the European Union, it could embrace a supporting ‘narrative’ that would also tend in a more dovish direction, he said.

For example, ‘they could say that we have to close the output gap, or that we have to consider member states’ growth divergence and do something about this’, he said. ‘Together with a more symmetric inflation target, this could give more urgency today to correcting undershooting, which means a higher tolerance for inflation.’

It is not out of the question that the ECB would tinker with its current medium-term orientation in favour of the business cycle as the relevant time horizon, he said. This would maintain the flexibility of the ECB’s reaction function, but ‘would also underline more clearly that past inflation performance is taken into account in the overall assessment for future monetary policy actions’, he said.

Mourmouras agreed that the strategy review presented a window of opportunity for the ECB to address the persistent undershooting of its target, which in the long term could weaken inflation expectations.