ECB’s Stournaras: ‘Would Have Preferred a Smoother Path of Interest Rate Increases’

4 November 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Yannis Stournaras on Friday made the case for smaller ECB interest rate hikes, saying that he had supported a 50bp move at last week’s monetary policy meeting.

In an interview with Politico, Stournaras, who heads the Bank of Greece, said, ‘Personally, I would have preferred a smoother path of interest rate increases’, noting the chiefly supply-side nature of euro area inflation; contained second-round effects and expectations; and the decline lately of energy prices.

‘My personal gut feeling is that inflation next year will be less than the 5.5% assumed in our baseline scenario’, he was quoted as arguing.

Overly aggressive monetary policy would come at the expense of an already deteriorating growth outlook, he said. Moreover, ‘monetary policy alone cannot deal with current inflation levels’, he said. Without the support of tax and energy policies, the consequence could be ‘skyrocketing interest rates’ and ‘make the cost in terms of output much, much higher’, he said, according to Politico.

‘If we want to bring down inflation under the current circumstances without much damage to financial stability and without the interest rates skyrocketing, monetary and fiscal policy cannot go in opposite directions’, he said, urging tighter 2023 fiscal policies. ‘If fiscal policy is very relaxed, then, unfortunately, that means that interest rates are going to the sky, which we don’t want to happen.’

‘The energy shock is going to impart a strong recessionary impulse to the economy. The weakening in our economies, but also in the US and globally, will lead to a further contraction of demand’, he said. ‘There are increasing risks that the euro area could be headed into a recession.’

Any steps to reduce the ECB’s balance sheet ‘should be cautious and gradual, as quantitative tightening reinforces interest rate increases across the yield curve’, he said. ‘Scaling down central banks’ balance sheets to pre-crisis levels may lead to sharp increases in sovereign bond yields globally and widening spreads of vulnerable sovereigns, with severe consequences for financial stability and the economic prospects.’

According to Politico, Stournaras said the Council had agreed to tackle quantitative tightening only after hiking rates.