ECB’s Stournaras: See No Evidence Yet That We Should Change Policy

13 May 2021

By David Barwick – FRANKFURT (Econostream) – There is no evidence calling for a change in the European Central Bank’s asset purchases under its pandemic emergency purchase programme (PEPP), ECB Governing Council member Yannis Stournaras said Thursday.

In a fireside chat at the Delphi Economic Forum, Stournaras, who heads the Bank of Greece, rejected the possibility of a change in ECB asset purchases. ‘Up until March 2022, we continue with our PEPP program, with TLTRO [targeted longer-term refinancing operations], so we don’t see any evidence that we should change our policy yet’, he said. ‘So, smooth sailing for the moment.’

Even in 2026, euro area inflation would only be 1.8%, he said. ‘So, according to available evidence and according to our Neo-Keynesian models, I insist on that, we are not yet close to our target’, he said. The US ‘is in a different phase of the business cycle, but in Europe the fear of inflation is not yet here.’

Still, there was ‘no question that there was some increase in expectations’ of inflation, he said. However, while supply constraints and pent-up demand are pandemic-related forces tending to feed inflation, other trends relating to technology, competition and demographics suppress price pressures, he said.

‘’So, which ones will win, we don’t know’, he said. ‘In Europe our models, show that we are not yet to worry about inflation, or not to worry as perhaps in the United States. But even in the United States, we don’t know. As you know, the labour market data came out a few days ago, they are weak, so we have to wait, to be patient.’

Stournaras pronounced himself in favour of overshooting the ECB’s price stability target, calling the perception of the 2% objective as a ceiling ‘a problem’ on account of the resulting ‘disinflationary bias in our monetary policy.’

In fact, ‘the definition of price stability is 2%; it is not below 2%’, he said. ‘And on top of this, the market now thinks that in the Eurozone the ECB’s target is not 2%, it is 1.6% to 1.8%.’

The fact that inflation has long been well under 2% would justify some overshooting, he indicated. ‘When we say that inflation is 2% on average, it means that undershooting should imply overshooting’, he said. ‘Now, by how much, for how long, there are technical issues that we have to settle later.’

In the context of its strategy review, the ECB is considering making 2% a target more explicitly, he said. ‘Of course, we have not decided it yet, but I think we are very close’, he said. Possibly by autumn there will be a decision, he said. ‘I hope there will be an agreement, because I think it is correct to have a 2% target, average target. I think the Federal Reserve has done well in revising its strategy.’