ECB’s Herodotou: Meeting-by-Meeting Approach to Rate Hikes Should Consider Chances of Recession
14 November 2022
By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Constantinos Herodotou on Tuesday said that decisions about rate hikes should take into account factors including the probability of recession.
In an interview with Greek financial daily Naftemporiki., Herodotou, who heads the Central Bank of Cyprus, said that euro area inflation would remain above target ‘for a long time’.
The ECB’s 75bp rate hike last month was ‘another important step towards exiting the accommodative stance of monetary policy in which we still find ourselves’, he said. ‘It is expected that interest rates will rise further in order to ensure that inflation returns to our medium-term target of 2%.’
The Governing Council’s meeting-by-meeting approach to rate hikes should consider ‘factors such as the inflation outlook, the chances of a recession, the impact of the measures we have taken so far, the lag of the measures, etc.’, he said.
As the ECB nears ‘the neutral interest rate range’, he said, ‘the pace of interest rate increases may need to be adjusted to ensure that we have sufficient evidence from the real economy about the effects of monetary policy.’
As for quantitative tightening, this could ‘also be discussed’, he said, ‘at a later stage and when necessary’. It was most appropriate to remain data-dependent and make decisions at each meeting, ‘without predetermined guidelines’, he said.
‘As long as inflation remains above the ECB's medium-term target, any delay in raising interest rates would prolong the negative effects on economic activity and household purchasing power, in which case even more painful measures would be needed to correct the situation’, he said.
There was a ‘significant’ probability of recession in the euro area as a consequence of Russian military aggression, but it is expected so far to be shallow and short, he said.
Herodotou appeared to differ with the ECB’s adverse scenario, calling this ‘particularly pessimistic.’ Many of the underlying assumptions, such as a complete stop of Russian gas imports, have luckily failed to materialise to date, he observed.
‘The possibilities of replacing lost gas supplies from Russia, as was the case with the increase in LNG imports, were also not taken into account’, he reasoned. ‘Nor did it include a coordinated response by the EU member countries to energy shortages. We may well be between the baseline and the adverse scenario, and this is what other assessments, such as the recent IMF one, which is closer to the assumptions of the ECB's baseline scenario, show.’
Still, he warned that a deterioration of the euro area’s economic situation meant that ‘pressures on the euro exchange rate are also likely to increase.’