ECB’s Herodotou: ‘Material Uncertainty Continues to Persist’; Must Be Data-Dependent

6 October 2023

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Constantinos Herodotou on Friday said that a high level of uncertainty made it necessary for ECB monetary policy to be data-dependent.

In a speech delivered at the 14th Limassol Economic Forum and posted to the website of the Central Bank of Cyprus, which he heads, Herodotou said that monetary policy was transmitting and having the desired effect.

If interest rates were left long enough at their current level, this would help restore price stability, he said. ‘However, material uncertainty continues to persist in the euro area’, he said.

Resurgent energy prices could ultimately feed through and boost overall inflation, he said, whilst ‘the elevated wages and profit margins, the profiteering, observed in the euro area last year and part of this year, need to be monitored closely, even though they are currently expected to normalise.’

Liquidity conditions also warranted watching, he added.

‘These uncertainties are the reason why I believe the ECB Governing Council approach to be data-dependent in its interest rate decisions, is indeed the right one’, he said. ‘In other words, determine the appropriate level and duration of its tightening policy stance, based on incoming economic and financial data and the consequent projections.’

The economy would pick up starting early next year, driven by higher real income due to lower inflation and increased wages; by strong labour markets; and by improved foreign demand, he said.

Governments should avoid or withdraw non-targeted fiscal measures, as these ‘risk extending the duration of high inflation, and consequently would force the extension of the duration of high interest rates in order to tame inflation and bring it back to the 2% target’, he warned.