ECB’s Stournaras: Policy Normalisation Should Observe Principles of Gradualism and Flexibility

26 September 2022

By David Barwick – FRANKFURT (Econostream) – The European Central Bank should adhere to the principles of gradualism and flexibility in normalising monetary policy, ECB Governing Council member Yannis Stournaras urged on Monday.

According to talking points prepared for his participation in an Economist conference, Stournaras, who heads the Bank of Greece, observed again that inflation in the euro area was largely supply-driven.

‘This means that it cannot be tackled solely by the normalisation of monetary policy, but also requires complementary energy policy and fiscal policy action at European level’, he said. Normalisation can thus only address inflation expectations and second-round effects, he said.

‘In my view, the ECB should maintain the basic principles of gradualism and flexibility, since the problem it faces is different from that faced by the Fed in the US’, he said.

Stournaras warned that ‘[t]he combination of rising interest rates and the very large increase in energy prices pose risks to corporate balance sheets and to household disposable income, which, in turn, pose risks to banks' balance sheets.’

As for real economic developments, 2022 was going better than expected, he said, thanks chiefly to tourism and pent-up spending.

‘Especially for Greece, the GDP growth that is currently expected for the whole of 2022 is much higher than initially expected, and moves around 6%’, he said.

Still, there was no room for complacency, he cautioned.

‘For 2023, the combination of (i) rising interest rates, (ii) very high gas prices, (iii) the gradual, further withdrawal of state aid for fiscal reasons and (iv) the depletion of 'depressed' demand, may lead economic developments in the euro area closer to the worst-case scenario than to the baseline scenario’, he said.

This would also impact Greece, he said, though European recovery fund money would cushion the blow, provided Greece adheres to fiscal targets and implements agreed reforms.

‘The objective of acquiring investment grade becomes even more imperative under them, the most unfavourable, international economic and financial conditions’, he added.