ECB’s Herodotou: Just Because Inflation Tops 2%, That’s No Reason to Hike Rates

8 April 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Constantinos Herodotou on Friday said that inflation in excess of 2% was not per se grounds to hike official borrowing costs.

During a panel discussion at a conference in Greece, Herodotou, who heads the Central Bank of Cyprus, said that ‘[i]nterest rates should not react simply because inflation is higher than 2%.’

He reminded that the conditions of the ECB’s forward guidance for a rate hike had to be ‘fully met’.

‘[W]e need to make sure that we know that by changing interest rates, those supply-side issues will not be resolved’, he said. ‘On the contrary, the squeeze that the household incomes are currently feeling and the profit squeeze that enterprises are currently feeling will be exacerbated by the increase in financing costs.’

The ECB would naturally act if it saw ‘spillover effects or demand side effects’, but the euro area is in a different situation compared to the US, so that ‘the Fed policy is quite different, justifiably so, than the ECB policy’, he said.

Still, he agreed that stagflation in the Eurozone was unlikely, noting ‘healthy GDP growth’ and continued labour market dynamism.