ECB’s Stournaras: Russian Aggression Deflationary in Mid-Term, Reason for Policy to Go Slow

28 February 2022

By David Barwick – FRANKFURT (Econostream) – Russian military aggression against Ukraine has deflationary implications for the medium term and is a reason to take special care not to tighten monetary policy too early, according to European Central Bank Governing Council member Yannis Stournaras.

In remarks delivered on Friday at a Eurofi conference and published today, Stournaras, who heads the Bank of Greece, said that current inflation was mainly driven by supply-side factors, in particular the pandemic, energy prices and, most recently, Russia’s attack on its neighbour.

‘In the short term, its implications are stagflationary, but, in the medium term, the implications are deflationary, depending of course on the resolution of the uncertainty’, he said with respect to the Russian invasion. ‘We do not know much about the resolution of the Ukrainian crisis at this moment, so we have to be cautious.’

Supply constraints are resolving and could be expected to continue to do so as the pandemic ends, he said, whilst energy prices would ease along with excess demand. ‘However, the Ukrainian crisis and its resolution is likely to delay this’, he added.

Projections of the ECB and major financial institutions indicate convergence to 2% inflation over the medium term, he said, and forward measures corroborate these forecasts.

With no sign of significant second-round effects on wages, ‘inflation will remain elevated for longer than we have thought, but is expected to decline to levels compatible with our price stability objective in the medium term’, he said.

The ECB ‘will not hesitate’ if necessary to pursue policy normalisation and ‘will do “whatever it takes” to achieve our medium-term price objective’, he said. ‘Consequently, if we see prospects of inflation exceeding our target in the medium term, we will act accordingly in March or later.’

‘But we will review the evidence carefully, since we do not want to repeat past mistakes of tightening too early, especially in the face of such an important supply shock like the one caused by the Ukrainian crisis’, he added.

Stournaras said he was ‘not convinced at all’ that pre-pandemic deflationary tendencies had reversed.

Monetary tightening would commence in June, when banks repay funds borrowed in targeted longer-term refinancing operations (TLTROs), he noted.