ECB’s Stournaras: Banking Sector Turmoil Means Monetary Tightening We Need to Take Into Account

23 March 2023

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Yannis Stournaras on Thursday said the ECB had to take into account that banking sector turmoil would effectively do part of its tightening job for it.

During a panel discussion at a Politico conference in Paris, Stournaras, who heads the Bank of Greece, said, ‘I think recent events imply more tightening. Banks have become or will become more conservative. That means that, let’s say, 10bp of tightening before this banking event that happened in the United States and in Switzerland is not 10 bp now, it’s higher. So, we have to take this into account.’

Stournaras supported the ECB’s departure from forward guidance. ‘We should make no pre-commitment’, he said. ‘I’m glad that we decided in our last meeting that we’ll give no forward guidance. So, meeting by meeting approach, data-based, and this is what we’re going to do.’

Still, he argued strongly for prudence in hiking.

‘First of all, inflation still remains high, much higher than our target, but it is declining. … mostly because of gas prices falling, oil prices falling, but we don’t need to be shy about that’, he said.

‘So, inflation is falling. GDP growth is perhaps better than we expected, but it’s still weak’, and a relatively high amount of output would be sacrificed to each basis point of monetary tightening, he said.

‘Then we have this banking turbulence, which we welcome that the authorities both in the United States and in Switzerland took very swift action’, he said. ‘But I like to quote Aristotle here, who said that sometimes the whole is bigger than the sum of its parts. … we should not forget that financial crisis might spread very quickly, like fire in the wood, so we have to be careful here. So, it’s both macroeconomic developments, but also financial stability that make me feel that we should be prudent, more prudent than before.’

The ECB needed to keep in mind what its objective was, he urged.

‘Our target is not underlying inflation, it’s headline inflation’, he said. ‘Headline inflation is falling, and studies in the ECB show that when headline inflation falls or rises, then underlying inflation falls or rises with a lag. So, the important thing is headline inflation.’

While declining to confirm that the ECB might face a trade-off between financial stability and its mandate, he conceded that the banking sector turmoil made life more difficult.

‘When things are normal, we can say that we can separate completely price stability and financial stability, and with separate instruments’, he said. ‘But when there’s turbulence, okay, we have to be more careful here. I wouldn’t say that there is a trade-off, but we have to tread on a thin line, so I would be careful to use the expression that it can be separated completely.’

Asked about the advisability of accelerating the reduction of the ECB’s balance sheet, Stournaras prefaced his remarks by saying, ‘Inflation still remains a problem. It’s much higher than our target.’

‘Now, on liquidity, we should not forget that two years ago … M3 was growing at 13% a year’, he continued. ‘Now, it’s growing at only 3% a year. So, we have already observed a big reduction in the liquidity position in the economy.’

‘Second, we should not forget that we have already tightened our balance sheet much more than this €15 billion a month that started in March,’ given the change in TLTRO conditions, he added. ‘Why do we keep TLTRO out of the picture?’

‘So, we have to be careful, because QT implies more monetary tightening’, he said. ‘So, we should put together interest rate hikes and QT. Of course, we have to bring down, definitely, these huge assets that we have created during the crisis. But we should do it in an orderly way.’