By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Yannis Stournaras said in an interview that appeared Saturday on Greek website Liberal.gr that the ECB’s response to the Middle East energy shock would depend on whether higher energy prices became a more lasting inflation problem.

Stournaras, who heads the Bank of Greece, said monetary policy should not respond automatically to higher energy prices.

“[T]he reaction of monetary policy cannot be mechanistic,” he said.

The policy response would turn on how long and intense the shock became, whether it spread into wages and broader prices, and whether inflation expectations stayed anchored, Stournaras said.

“For the Governing Council of the ECB, this is an extremely delicate balance,” he said.

The ECB had to bring inflation back to its 2% medium-term target while avoiding excessive restraint that would unnecessarily weigh on activity and investment, Stournaras said.

The starting point was more favorable than in past shocks, with inflation near target and the Eurozone economy still relatively resilient, he said.

So far, the data did not point to a broad spread of higher energy prices into wage-setting, prices of other goods and services, or longer-term inflation expectations, which remained close to 2%, Stournaras said.

At the same time, damage to energy infrastructure in the Persian Gulf could prolong inflation pressure over the medium term, he said.

Supplier bottlenecks were also resurfacing, with delivery schedules lengthening and input costs rising, while confidence indicators pointed to weaker growth, Stournaras said.

Households and companies were operating under unusually high uncertainty, he said.

“This uncertainty is already reflected in financial conditions,” he said.

Banks had become more guarded in lending to companies as risks increased, Stournaras said.

If inflation were to move significantly above target but the overshoot still looked temporary, a measured tightening of monetary policy could be needed in the near term to limit second-round effects without putting disproportionate pressure on the economy, he said.

“In the Governing Council, we will continue to closely assess all available data and remain ready to set policy rates at levels consistent with maintaining price stability over the medium term,” he said.

Asked about Greece’s vulnerability to another prolonged energy crisis, Stournaras said the economy was much better positioned than in the past, though no economy could be fully protected against major stagflationary shocks.

Greece had entered the current period from a stronger macroeconomic and fiscal position, helped by regained investment grade status, market access, a healthier banking system, lower public debt and high cash reserves, he said.

“The country currently has a greater capacity to absorb crises than in 2022 or even more so than in the previous decade,” he said.

Risks had not disappeared, Stournaras said. Dependence on imported energy, inflation pressure and possible effects on consumption, production and tourism remained vulnerabilities, especially if the crisis persisted, he said.

Any fiscal support should be temporary, targeted and consistent with fiscal sustainability, Stournaras said.

Broad-based measures were expensive, had limited effectiveness and could intensify inflation pressure, he said.

Longer-term resilience depended on faster investment in renewables, upgraded electricity grids, stronger cross-border energy links and better-functioning energy markets, Stournaras said.

European funds also served as an important stabilizer by supporting green investment and limiting the impact of external instability on activity, he said.

Because the energy disruption was common to Europe, no country could deal with it effectively alone if it lasted long enough, Stournaras said.

“A European response is needed,” he said.