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Interview of the Bank of Greece Governor Yannis Stournaras with Bloomberg

14/03/2024 - Articles & Interviews

ECB Must Cut Rates Twice Before Summer Break, Stournaras Says

- Greek central bank chief speaks to Bloomberg in interview

- Structural bond portfolio will include government bonds

By Mark Schroers

The European Central Bank must lower borrowing costs twice before its August summer break and two more times before the end of the year, without being swayed by the US Federal Reserve, according to Governing Council member Yannis Stournaras.

“We need to start cutting rates soon so that our monetary policy does not become too restrictive,” Stournaras, who also heads Greece’s central bank, said in an interview in London. “It is appropriate to do two rate cuts before the summer break, and four moves throughout the year seem reasonable. Insofar, I concur with the markets’ expectations.”

The ECB left policy unchanged last week for a fourth consecutive meeting with officials converging around June as the appropriate juncture to start easing. They have become more confident that inflation is heading toward the 2% goal, but seek further reassurance before deciding on interest rate cuts.

The Frankfurt-based central bank has monetary policy decisions scheduled for April 11, June 6 and July 18. After that it doesn’t meet again until Sept. 12. Stournaras is a well-known dove in the Governing Council, though he recently aligned with more hawkish members on the need to wait until June.

“We will have only little new information before the April meeting, especially on wages at the start of 2024 — but we will get a lot more data before the June meeting,” Stournaras said, echoing comments by ECB President Christine Lagarde last week. “I think to cut rates already in April we will need to see the economy crashing and I don’t expect that.”

In the wake of the comments, money markets maintained wagers on the scope for reductions in borrowing costs this year, with the first quarter-point move seen by June, followed by two more with a 70% chance of a fourth.

Stournaras said that “economic growth in the euro area is much weaker than expected and risks are to the downside, while inflation has come down significantly and the risks are balanced.”

He also downplayed still strong nominal pay increases by stressing that real wages will reach the pre-pandemic level only in 2025.

“So wages are still catching up, not leading inflation. We should not exaggerate the risk of a wage-price-spiral,” he said. Even more so as “nominal wage growth is moderating and profits are absorbing part of the pay increases.”

Underlining the need to lower borrowing costs soon, Stournaras referred to Bank of Greece estimates that “30% of the tightening of past interest rate hikes are still in the pipeline.”

“On top of that, the ECB’s balance sheet will shrink by around €800 billion this year, through TLTRO repayments and the phasing-out of APP and PEPP reinvestments,” he added. “Just as interest-rate hikes, this per se leads to tighter financial conditions too.”

Stournaras fiercely rejected the discussion that it might be problematic or risky if the ECB eases monetary policy before its US counterpart.

“I don’t buy at all the argument that we can’t cut interest rates before the Fed does so — and almost all of my colleagues agree with that,” he said.

Austria’s Robert Holzmann has repeatedly said that he doesn’t think the ECB should move first — even after Lagarde insisted that her institution “will act independently” and others backed her.

“We are completely independent and the euro area is a large open economy with a flexible exchange rate”, Stournaras said. “We have to do what is necessary for the euro area economy – nothing else.”

The situation in the 20-nation region is “very different” from the one in the US, where the economy is growing, also thanks to an expansionary fiscal policy, and inflation is stickier, he said. “The case for rate cuts is much more conclusive for the euro area than for the US.”

Beyond 2024, he expects the deposit rate, currently at a record-high 4%, “to gradually go down to 2% at the end of 2025 or the beginning of 2026.” He judges this to be a neutral level. “For the moment I don’t see rates go below 2% as it was the case before the pandemic.”

With this week’s rethink of the ECB’s so-called operational framework, “we learned the lessons from recent years and have made the ECB a more modern central bank,” Stournaras said.

He stressed that at the moment nobody knows what the appropriate level of bank reserves and of the ECB’s balance sheet is.

“In the end, the banks will tell us and determine how much liquidity they need,” he said. “We will get to this point gradually, step by step, so that we don’t risk any unintended turmoil.”

He expects the ECB’s balance sheet to be smaller than today, but bigger than in the past, saying that “we will not get to that point in the next one to two years.”

An envisaged new structural bond portfolio “will help to stabilize the economy,” he said.

The details still have to be discussed, “but the portfolio will also include government bonds,” he said. “We will make sure that it doesn’t violate the prohibition of monetary financing in the EU treaty.”

He highlighted “different parameters to do so — maturity, capital key, the issuer and issuance limits.”

Different Views

Also under discussion are the details of the future longer-term refinancing operations.

“I and others would be in favor of sticking to the fixed-rated full allotment also for longer-term operations — other colleagues have different views,” he said. “We will have a deep look into it and then decide.”

If needed, the ECB will not hesitate to act in the meantime, Stournaras said.

“If for some reason short-term money market interest rates move away too much from the deposit facility rate, we will intervene with more liquidity,” he said. We are always flexible and will at any time react appropriately.”

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