TRANSCRIPT: Interview with ECB Governing Council member Stournaras on 11 July 2023

13 July 2023

By David Barwick – ATHENS (Econostream) - Following is the full transcript of the interview conducted by Econostream on 11 July with Yannis Stournaras, Governor of the Bank of Greece and member of the Governing Council of the European Central Bank:

Q: Governor, you said that if we hiked after September, you’d find it surprising. That seemed to imply that a September hike wouldn't surprise you. And yet, there are reasons why we may not need it.

A: This is true. July is almost a done deal. Almost. But regarding September, I'm quite agnostic. It might be, it might not be. But I would be very surprised if we continue hiking after September.

Q: So, a September hike is not a given.

A: It's not a given at all, especially since data point to economic stagnation in the third quarter.

Q: We've seen comments from your colleagues that we also take to mean that a September hike is uncertain. Vice President de Guindos said that we’re starting to see the impact on the real economy.

A: Indeed. There’s good news on inflation and signs that even core will continue falling. We know that core lags headline inflation. Meanwhile, the economy is weak. So, we must be very prudent. That's why I say we must follow a data-dependent approach in September, and why I'm very, very agnostic about hiking then.

Q: I find interesting that Bundesbank President Nagel said on June 16 that we may have to hike after the summer break. But now he only says that it's very uncertain and everything depends on the data.

A: We have signs that the economy is weakening. Our baseline calls for positive growth, but it seems that this might not be so.

Q: Right after the last decision, a number of people supported the possibility of another hike in September. Do you think that scenario has since then become less likely?

A: I think data are the catalyst here, and they point to lower inflation and a weaker economy.

Q: What about the possibility that the effect of the previous tightening could be nonlinear?

A: Monetary policy acts with a lag, and the lagged impact can be nonlinear. After all, there are cumulative effects on banks, industry, households. Available evidence shows that we haven't yet seen such a cumulative effect. We’ve seen only a small part of it, but perhaps in the coming months, we'll see much more.

Q: It's reasonable to say that the vast majority of the tightening hasn't had time to have an impact.

A: Indeed, the vast majority hasn't had its impact yet. 400bp is a huge amount of tightening, plus the reduction of the balance sheet, which is also important, along with the contribution of the TLTROs repayments.

Q: And is the economic slowdown that you talked about a moment ago due to monetary tightening?

A: Yes. It has to do inter alia with the impact of monetary policy tightening. This is with respect to economic activity. As for inflation, in Europe, this has been mostly supply-side in origin. That means that we may now have supply-side deflation, that is, energy prices falling. So, the slower inflation is partly the effect of monetary policy, but also the undoing of the initial supply-side shock. This shock has now been reversed.

Q: Recently we’ve seen that in China, there are even fears of deflation.

A: This is true. In China, there is much lower growth and soon perhaps negative consumer price inflation. This, along with the 3% US inflation in June, is good news for European inflation.

Q: I mean, in the end, given all the arguments, is a July rate hike in the euro area even really needed?

A: You raise a very important issue here. We are data-driven, we have to review the evidence very carefully in July, especially the weakening economic activity.

Q: Even if we just leave rates where they are, we still get a restrictive effect.

A: Yes, we are in restrictive monetary policy stance now.

Q: So, it seems like the ECB has painted itself into a corner by promising to do something in July.

A: This can be changed. If developments show that it's not necessary, we won’t do it. There is not any holy promise. We're data-driven. This is what matters. And we have used expressions about July like “likely”. But the data have now become weaker.

Q: But having flagged a July rate hike, the ECB would probably hesitate not to go through with it.

A: We’ll see. We usually find a “golden middle” that lets us reach agreement by consensus.

Q: If there were no hike in July, would the ECB risk being seen as not committed to fighting inflation?

A: No, I don't think anybody can say that, with all the tightening, the balance sheet reduction, the cessation of APP reinvestment and no new PEPP purchases. Our commitment would still be obvious.

Q: And is it important to get a soft landing out of this?

A: Yes, of course it is. It has to do with the efficiency of monetary policy. Nobody wants a policy that will have a large negative impact on the real economy and destroy jobs and companies. No, we want a soft landing. And we weight it very, very heavily in our decision-making.

Q: It seems clear, though, that the risk of not having a soft landing has increased.

A: Yes, it has increased, but so far, we might have stagnation, but not recession.

Q: Would you say that a July rate hike comes with a risk that it's going to lead to a hard landing?

A: Given that it now seems that the data are pointing to a weaker economy than our baseline forecast, yes, we have to be very, very prudent, even in July. Also, there’s all the evidence that inflation continues falling. So, we have to review all the evidence before deciding, taking into account the tightening effects already in the pipeline.

Q: What about the 2.2% HICP forecast for 2025? Isn't it more or less consistent with price stability?

A: Yes, I think so.

Q: One hears different views…

A: We have no evidence of a wage-price spiral, and no evidence of de-anchoring of inflation expectations, either through surveys or through market measures. All in all, our policy works and it seems that the supply-side shock is reversing now through lower energy prices. Food inflation is a problem, but that has to do with many things that are entirely supply-driven in nature.

Q: The latest consumer survey of the ECB showed expectations of future inflation continuing to fall.

A: This is true.

Q: To me, this calls into question the need for more tightening. July, maybe, but why September?

A: We’ll look at everything, including core inflation, because a number of colleagues are concerned. In my view, headline inflation is our target and is the most important, because core simply follows it.

Q: In some cases, it may serve their purpose, if they strongly want even tighter policy.

A: Maybe. But the purpose is not to tighten without any due reason. None of our colleagues is in such a mood, I think. It's a good team.

Q: Speaking of team, it seems that those of you on the dovish side have been very patient. When is the time going to come that you just put your foot down and say, “That's it, no more”?

A: It is the strength of arguments that matters more than anything else. And believe me, it's very civilised on all sides, even in very difficult moments. Of course, opinions vary. But economics is not an exact science. I’ve said many times it's a social science with a lot of uncertainty. It's even higher now.

Q: You spoke of the cordial nature of discussions. But we've seen some Council members express impatience about other members’ willingness to make pronouncements regarding future moves.

A: Well, we live in a democratic world, and everybody can say whatever he or she wants. But we are judged by the public, we are accountable, and at the end of the day, many people out there such as analysts, journalists and politicians are assessing carefully what we do and say.

Q: But after the July meeting, will we be on a truly meeting-by-meeting, data-driven basis?

A: I think we’ve taken a wise decision: no more forward guidance. It was needed close to the lower bound, when inflation was very low and interest rates were very, very low, even negative. But now, we don't need forward guidance, and it can lead us astray.

Q: How do you see the most recent macroeconomic forecasts?

A: Our baseline shows a declining trend with respect to inflation. Of course, it's still higher, much higher than our target, but it is falling. The economic activity however is perhaps evolving in a less benign way than our baseline. That's my understanding now.

Q: And inflation risks are still mostly to the upside?

A: In my view inflation risks are balanced now. Of course, there is still huge uncertainty. What is important is that inflation in China is now expected to turn negative; this is very important. The economy's weaker. US inflation fell rapidly in June, to 3%. Euro area inflation lagged US inflation on the upside and now it is lagging it on the downside. So, all in all, I think Europe will follow soon. That's my reading of the data.

Q: Do you have a view as to how long rates will have to remain at their peak?

A: Nobody can say for how long. It depends on the state of the economy and inflation.

Q: Do you have a particular condition for being able to loosen policy again?

A: If inflation falls as in the baseline, yes, I think we can start reducing interest rates after some period. Of course, nobody can say how long that period is.

Q: But it would be in 2024.

A: Yes, presumably in 2024.

Q: Does the symmetry of the ECB’s objective require that inflation go below 2% now for a period?

A: No, If inflation follows our baseline path, that means that price stability is within grasp in the medium term. And then we should start bringing down interest rates, presumably in 2024. That's how I read the situation now. We should not overdo rate increases. There's no reason.

Q: The objective is not backward-looking anyway.

A: There is no need for this kind of symmetry. It is not required.

Q: Overall, it seems that there's not so much appetite to sell assets outright.

A: No. I think we already have a considerable amount of tightening because of the TLTRO redemptions and the cessation of reinvestments under the APP. Why should we experiment? It's not necessary, so why should we take more risks?

Q: And to be clear, you’re talking about risks to financial stability.

A: Of course.

Q: And the fact that you have the TPI in the background isn't enough to take any chances.

A: It's better to prevent the fire than to put it out.

Q: And the reasoning would be the same when it comes to changing the PEPP forward guidance?

A: Yes. There is no need to change anything on the PEPP. Flexible reinvestments under the PEPP are the first line of defence. The TPI is the second line of defence. But the best thing is not to have to use these instruments.

Q: And can we reduce the balance sheet enough just via a passive approach?

A: Yes. The contribution just from the TLTROs is already very large. It's already underpinning a very large reduction.

Q: Theoretically, it might never be necessary to actually sell assets.

A: We don't foresee selling assets.

Q: So that implies that there will be no acceleration to the pace of QT.

A: Correct, no acceleration.

Q: That was the original goal, because they always said QT should run quietly in the background.

A: That's exactly what's happening now. It’s very smooth, it doesn’t create any problem, doesn’t create any fragmentation phenomena. We like to see it continuing like this.

Q: And is one other argument in favour of this approach the losses on the part of the national central banks, and not increasing them by outright sales of assets?

A: We see no urgent monetary policy reasons for outright sales of assets. And it is also true that if we start selling assets, unrealised losses will become realised ones. It's unnecessary.

Q: What should the ECB’s operating framework look like? This is going to be a discussion soon.

A: We still have ample liquidity. So, we’re still using the DFR as the main instrument. I see no reason to amend the operational framework right now. The current framework works very well.

Q: But by the end of the year, maybe we'll have to discuss it?

A: Yes, as we move to a situation of less ample liquidity.

Q: It seems that discussion would be better after the ECB has hit the terminal rate.

A: Yes. Everything at its time and one thing at a time. We shouldn't put everything on the table.

Q: When the time does come, do you have a preference for a floor or a corridor system?

A: No, I'm open to arguments. But it seems now that our present system works well.

Q: On a different subject, the Greek economy has been outperforming, which must be satisfying.

A: The Greek economy is entering a phase of higher growth than the European average. At the same time, the public debt-to-GDP ratio is falling fast because of a positive snowball effect. The new government is determined to push through a number of reforms needed by the economy. It has a clear political horizon of at least four years. The big challenge now is to regain investment grade.

Q: Which will be this year.

A: Yes. I'm sure it will be.

Q: Can you express in numbers the growth impact of the return to investment grade?

A: To a certain extent, some impact has already occurred. For instance, it is already reflected in Greek bond yields. But it has not yet been discounted in terms of FDI flows. I can give you one number here: only 10% of the funds - private equity, etc. - can invest in a jurisdiction without investment grade. So, you can imagine what the space would be for new foreign direct investment, or financial investment, when we get investment grade. Many more funds will have the appetite to invest in the Greek economy.

Q: Would you agree that the Greek economy is in a uniquely advantageous position in the euro area?

A: We don’t want to boast and we must manage expectations carefully since we don't want to risk overheating. Ideally, we want real convergence, that is convergence in GDP per head in terms of purchasing power parity, but without macroeconomic imbalances.

Q: But do you see a real danger of overheating?

A: Not yet, because tight monetary policy also affects Greece. We are now at a growth rate of 2.2%, when Europe is at zero. Next year, we expect 3%, and the year after that almost the same, so Greece will converge in real terms, but the challenge is to avoid macroeconomic imbalances. Inflation now is below the European average, and core inflation also fell dramatically. So, the situation is as I described: real convergence without macroeconomic imbalances. This is the way we want it to continue.

Q: And would an additional increase in rates by the ECB have a noticeable impact for Greece?

A: Not much as the fiscal position of Greece is concerned. Due to the favourable public debt agreements with our borrowers in the past (in particular the ESM) and because of swaps the public debt office has done, the effective interest rates on public debt will remain all but fixed at a low level for a long period. So, we are set, but we want this benign situation to continue. Of course, when you start borrowing from the market, the effective interest rate is going up, but it goes up very slowly. So, we don't face the phenomenon of an immediate pass-through of higher interest rates on the effective interest rate on public debt. However, banks, private and public sector companies as well as households are being affected by the higher ECB interest rates. This effect will partially be mitigated when Greece gets investment grade.

Q: Of course, when you go to Frankfurt, you and your colleagues think of the euro area on average…

A: Absolutely correct!

Q: But still, the good position of Greece must make it a little bit easier to support the tightening.

A: We target average euro area inflation in the ECB. Ideally at the ECB we do not represent member-states, but rather the interest of the euro area as a whole. I try as much as possible to respect this principle. Regarding Greece, it was through a lot of blood, sweat and tears that we have managed to have the current benign situation, which is giving me more degrees of freedom and allows me to argue in favour of the euro area as well as Greece. It took a long period of tough austerity and sacrifices. But all in all, we have been successful, when very few people thought that it would be so in 2012 or 2015.

Q: To some extent the sacrifices are still being made, because wages are still somewhat low.

A: Yes, but they're going up now. And we want them to go up, but in a measured way, without generating a wage-price spiral. Everybody has a responsibility to contribute to domestic stabilisation.

Q: How do you regard fiscal developments from a monetary policy point of view?

A: There's been a lot of work by the IMF and the ECB, like the study presented by the IMF chief economist in Sintra [at the ECB’s annual conference end-June in Portugal], that shows that fiscal policy so far has contributed to lower, not higher inflation. This is true in the euro area in general and in Greece. We would like it to continue like this.

Q: And in the longer term, do you think euro area inflation is going to be systematically elevated?

A: No, I believe more in the school of thought that says that if the supply side shocks that we suffered up to now are eliminated, then we’re very likely to get back to a situation of lower inflation and of a natural real interest rate close to zero. We don't have any concrete evidence that this has changed.

Q: And if we get lowflation again, would you be as willing to use QE as in the past, or are you less so?

A: As you know, in the United States, in the UK and elsewhere open market operations are a normal situation. I would like to see the Eurosystem implementing a more flexible operational framework, so that if we need to buy assets, we do it.

Q: So, without a big debate and potentially setting up a new programme, but it should be regarded as permanently possible to do it on an ad hoc basis.

A: Yes. We must have all instruments available. I believe very much in flexibility, in realism, and not in dogmatic approaches to monetary policy.