ECB Insight: Stournaras Ready to Have His Cake and Eat It, Too

21 September 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Yannis Stournaras on Monday provided a glimpse into the nature of the tussle awaiting the euro area’s monetary authorities, lining up with numerous colleagues who’ve already conceded brighter inflation prospects, yet remaining as unwilling as ever to take the logical next step towards reduced accommodation.

In an interview with Politico, Stournaras, who heads the Bank of Greece, gave an assessment of the inflation outlook that dovetailed neatly with our observation yesterday that the drumbeat of ECB inflation warnings was becoming more intense.

‘We've accepted there's an upside risk regarding inflation’, he said.

Coming from him, that’s a lot. Still, his diction is noteworthy; ‘we’ve accepted’ conveys a tone of reluctance, even resignation. One might be excused for imagining that it required no small effort on the part of Eurosystem economists to finally convince a recalcitrant Stournaras, among the most dovish members of the Governing Council, that dwelling on downside risks no longer made much sense.

The impression that the concession was hard-won is reinforced by the qualification of his very next sentence: ‘In the past, however, we have over-predicted inflation, expecting that it moves towards 2% in the medium term.’

But make no mistake about it: grudging though Stournaras’ acknowledgment of a changed reality may be, the acknowledgment is there. Just three weeks ago, in an interview with Bloomberg, he would have nothing to do with upside risks.

‘Wage developments and unit labour costs, which determine the core of inflation, do not show the same volatility as headline inflation’, he said on that occasion. ‘On this evidence, I would advise caution regarding the course of inflation relative to our medium-term target.’

Despite his conversion, Stournaras saw no reason in the Politico interview to loosen his embrace of accommodative monetary policy. Indeed, the opposite seems closer to the truth, as he was reported to have drawn attention to the fact that inflation projections assume accommodative monetary policy.

It should come as no surprise that he called for monetary policy to show ‘patience and persistence’ while uncertainty remains elevated and confidence fragile. ‘There is, in my view, still some way to go before price increases raise inflationary concerns’, he was quoted as saying.

And as to whether the ECB’s pandemic emergency purchase programme (PEPP) would continue beyond its slated end-date of next March, Stournaras was clearly loath to contemplate the idea.

‘It would be really arrogant on our part to declare victory over the pandemic right now’, he said. ‘That’s why it is too early to draw conclusions about the extension or not of the PEPP beyond March 2022.’

It doesn’t take much insight to understand that his preference would be for ‘the extension’ rather than for the ‘or not’.

It comes down to this: when the dovish end of the spectrum of Governing Council members finds it hard to argue any longer that inflation prospects have not changed, this does not necessarily mean that the entire Council will march lockstep in the policy direction implied by the brighter outlook.

Though Greece is in a somewhat special situation, Stournaras is unlikely to be the only one who wants to have his cake and eat it too, conceding economic reality while clinging to the accustomed life preserver of monetary accommodation.

With few if any options, the predicament of the super-doves must be uncomfortable. That may help explain why Executive Board member Fabio Panetta, usually so vocal, has not given an interview since the end of July or a speech sind the end of June. 

ECB President Christine Lagarde is going to have her work cut out for her if she hopes to achieve unanimity, and may have to make do with mere consensus, as she recognized explicitly in July.