ECB’s Stournaras: Economic Cost of Higher Interest Rates Poses a ‘Policy Dilemma’
25 December 2022
By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Yannis Stournaras on Sunday suggested that monetary authorities faced a dilemma in balancing the need to combat inflation with the impact of higher borrowing costs on the economy.
In a commentary published in Greek daily To Vima, Stournaras, who heads the Bank of Greece, wrote that ‘[a]lthough the central banks' main objective is clear, a policy dilemma arises relating to the extent to which interest rates should be increased and thus the negative consequences for economic growth that monetary authorities will be able to accept in order to stabilise inflation over the medium term.’
As in the past, he focused on the supply-side nature of price pressures; monetary policy intervention, including ‘central banks drastically raising their interest rates’, was ‘despite the fact that the rise in inflation is, in most cases, due to negative supply-side shocks and especially to the increase in energy costs due to the war in Ukraine, the direct effects of which cannot be easily neutralised by monetary policy.’
Fiscal policy should shore up monetary policy by being restrictive, while wage increases should consider economic potential and neither contribute to further inflation nor undermine hard-won Greek competitiveness, he said.
The gloomier business outlook and lower consumer confidence, along with more restrictive monetary policy, would result in slower economic growth in Greece this year, he said.
Economic and in particular fiscal policy should remain oriented towards regaining investment grade for Greek sovereign debt, he urged. This ‘should be a non-negotiable national goal, as its achievement will have beneficial effects on all sectors of the Greek economy’, he said.