ECB Insight: Stournaras Comments Indicate Russian Aggression Seen by Doves as Grounds to Slow Normalisation

24 February 2022

By David Barwick – FRANKFURT (Econostream) – It was never likely to take long for those European Central Bank Governing Council members fundamentally disinclined to tighten monetary policy to hang their hat on what until late yesterday was still just a looming invasion of Ukraine by Russian dictator Vladimir Putin.

As it was, Bank of Greece Governor Yannis Stournaras managed to do so before the first shot was fired, even if his comments were only published after Russian aggression had been unleashed.

In an interview with Reuters, Stournaras called the outlook now ‘much more uncertain’.

‘Judging the situation from today's point of view, I would rather favour a continuation of the APP at least until the end of the year, beyond September, rather than bringing the end closer’, he said. ‘I wouldn't be in favour of announcing the end of APP in March.’

But was he ever in favour of announcing in March the end of the APP? One month ago, Stournaras was at the forefront of those continuing to rule out a rate hike in 2022, for which there were ‘many reasons’, he said.

‘For example, before the pandemic we all feared that we had fallen into what we call a structural recession in Europe, with very, very low inflation’, he explained at the time. ‘Not too many things have changed.’

Inflation was up due to pandemic-related barriers to production that would fall with the fading away of the pandemic, he elaborated further. ‘So, in Europe we see no reason why monetary policy should be tightened, apart of course from the gradual removal of the measures, the emergency measures for the pandemic’, he said.

That having all been said on January 24, Stournaras’ opposition today to announcing in March the end of the APP shouldn’t really surprise anyone. It would be true independent of the invasion, which the Greek central banker said was deflationary beyond the short term anyway.

‘In my view it is going to have a short-term inflationary effect – that is prices will increase due to higher energy costs’, he was quoted as saying. ‘But in the medium to long term I think that the consequences will be deflationary through adverse trade effects and of course through the rise in energy prices.’

Monetary policy is really not up to handling the supply shocks driving currently elevated HICP, he said, implying thus that there was no reason for monetary policy to try. The possibility of second-round effects went unmentioned, but then, a review of Stournaras’ comments going back several months indicates that this is a topic he avoids.

The fact that there is now war on European soil thanks to the delusions of one Russian madman may well be a reason for the ECB to turn particularly cautious for a moment, but is not necessarily grounds for the trend towards monetary normalisation to cease, and most policymakers are unlikely to see it as such.