ECB’s Müller, Wunsch Strongly Support More Rate Hikes; Stournaras Advocates Gradualism

30 August 2022

By David Barwick – ALPBACH, Austria (Econostream) – Various members of the European Central Bank Governing Council on Tuesday split along well-established hawk-dove lines with regard to their respective views of the appropriateness of aggressive monetary policy action in the face of gathering economic clouds.

In remarks during a panel at the European Forum Alpbach, Bank of Greece Governor Yannis Stournaras, the lone dove present, affirmed that ‘[w]e have a perfect inflation storm which is mostly supply-side driven’.

‘In my view this year we will see the peak of inflation and a steady deceleration thereafter … and converge to the inflation target in 2024’, he said.

Based on 5y/5y measures, inflation expectations, whilst subject to ‘some volatility’, were ‘very close’ to the ECB’s medium-term target of 2%, he said, whereas wage growth was ‘broadly consistent with the 2% inflation target.’

Being too aggressive about hiking interest rates ‘would aggravate the already negative output effect’, he said. Preferable would be to proceed ‘in a gradual but determined manner, incorporating optionality and flexibility … step-by-step normalisation … would be in my view the appropriate way’, Stournaras advocated.

Belgian National Bank Governor Pierre Wunsch said he was ‘a little bit less comfortable’ than his Greek counterpart about making forecasts, suggesting that ‘the problem is more structural than just repeated shocks’ and that the understanding of inflation’s drivers was imperfect.

It might be the case that interest rates need to be hiked to the point of being restrictive, he said. ‘We have to try in a way that’s a bit more forceful than we thought just a few months ago’, he said. As part of that, the ECB may ‘have to go beyond that [mere normalisation], but honestly, we will have to see’, he said.

Estonian central bank head Madis Müller supported Wunsch’ view that ‘it’s really difficult to say with a high degree of confidence how quickly the high inflation will come down.’ Whilst the current elevated rate could not persist indefinitely, he said, given base effects, the question of how high energy prices affected prices of other goods and services made it ‘difficult to say how long it will last and how quickly we will come back to the 2% inflation target that the central bank has set.’

That borrowing would become more expensive was regrettable, ‘but that’s unfortunately the role that the central bank has to take in a situation where the inflation is as high as it is in Europe’, he said.

Interest rates are still low, so the ECB needs to keep raising official borrowing costs, he said. He dismissed the idea that the potential hit to growth should stay the ECB’s hand, calling it ‘very clear’, also for the ECB itself, that its mandate was price stability.