Bank of Greece: Energy Prices Could Dis-Anchor Expectations, Prompt Tighter Monetary Policy

22 December 2021

By David Barwick – FRANKFURT (Econostream) – High inflation could persist and cause inflation expectations to come unanchored, leading the European Central Bank to tighten monetary policy sooner than currently anticipated, the Bank of Greece said Wednesday.

In its Interim Report on Monetary Policy 2021, the Greek central bank warned that ‘unequal access to vaccines between advanced and developing countries, the threat of a new surge of the pandemic due to the Omicron variant, and disruptions in supply chains increase uncertainty and pose risks to the path of inflation and the recovery of the global economy.’

‘In addition, a more pronounced and protracted rise in the prices of energy and other raw materials could keep inflation higher for longer and de-anchor inflation expectations, prompting a faster than expected monetary policy tightening, thereby increasing the risk of financial market shocks and of a reversal of the upward trend of the economies’, it continued.

Economic growth this year in Greece should turn out to be over 8% based on the latest data, and thus well above the 7.2% only recently projected by the Bank of Greece, the report said. ‘Growth is projected to be 5.0% in 2022 and 3.9% in 2023, subject to continued strong support from international tourism, euro area recovery and an acceleration of investment’, it said.

Greek HICP, among the lowest in the euro area, would register only ‘a slightly positive annual average rate in 2021’ and then ‘pick up in 2022, with positive contributions from all of its components’, according to the report. ‘However, inflationary pressures are expected to ease in 2023, conditional on an unwinding of global supply bottlenecks, and a fall in the prices of energy and imported raw materials and intermediate products.’

Upside risks for the Greek economy include faster private consumption and stronger tourism, while downside risks stem from the pandemic, inflation, ‘a likely increase in NPLs once the state support measures are phased out, and possibly a low absorption rate of NextGenerationEU funds’, the report said.

If the US Federal Reserve tightens its monetary policy surprisingly quickly, this could cause financial market shocks that would also hurt Greece, it said. ‘Finally, a growing bank-sovereign nexus amplifies both fiscal and financial risks.’

With regard to Greek fiscal affairs, Greece still falls short of an investment grade rating, the report noted. ‘This poses a number of problems, but most importantly mainly deprives the Greek economy of much-needed inflows of funds from abroad that could benefit many branches and sectors, in the form of low-cost credit or as equity financing’, it said.

Last week’s decision by the ECB with respect to Greek debt would ‘maintain favourable financial conditions and low borrowing costs for both the public and private sectors of the Greek economy’, it said. ‘In this sense, the ECB decision provides a “window of opportunity”, which Greece must not miss in order to obtain investment grade.’

Following full economic reopening, the Greek government must achieve primary surpluses to ensure sustainability, the Bank of Greece urged.