Interview of the Bank of Greece Governor Yannis Stournaras with MNI and Santi Pinol
05/11/2025 - Articles & Interviews
Eurozone Risks Tilt To Downside - ECB's Stournaras
Eurozone growth and inflation risks tilt to the downside, and further European Central Bank rate cuts cannot be ruled out, Bank of Greece Governor Yannis Stournaras told MNI, but he added that there were upside risks including the danger that higher inflation in the U.S. could spread through the world economy.
Overall, the balance of risks is to the downside, with euro area growth lower than expected over the past two years and a relatively strong currency keeping import prices lower and making financial conditions tighter, Stournaras said in an interview.
"You will see most of the arguments are in favour of inflation and growth becoming lower but despite that we don't jump to the conclusion that we should cut in the next meeting," he said.
"So we are at equilibrium. So why should we reduce interest rates? This is one question. If it continues to become weaker, okay, then we will consider it."
But some upside risks persist, he said, citing debt sustainability and political pressure on the Federal Reserve to further cut rates despite persistent inflation. "If inflation accelerates further [in the U.S.], import prices could rise globally. In fact, the higher longer-term yields may be signalling such risk."
December's staff projections for 2028 will be a "key input" for the ECB to assess whether inflation will stabilise at the 2% target in the medium term, but they will be considered alongside other data, he noted, adding that judgement will play an important role in future decisions.
Despite the symmetrical nature of its inflation target, the ECB should allow a margin of error, Stournaras said, adding that any undershooting is still only in a prediction while current inflation is still at 2%.
Asked how big an undershoot in its projections could be tolerated without prompting a cut, Stournaras said: "When it [actual inflation] starts becoming less than 2%, call me again."
The impact of any mitigation or delay in the implementation of the EU's ETS2 emissions trading system on the projections is unlikely to be large enough to change the picture, given that it would be a one-off impact, he said.
PROJECTIONS
Stournaras also rejected any suggestion that the ECB's projections tend to de facto arrive at the 2% target by the end of the horizon, though he acknowledged that this may have been more the case in the past.
"We are wiser now. So, I wouldn't say now that by definition our forecast works this way. We take everything into account. Not only models, but also data from other sources, energy for instance. And judgement, at the end it's judgement," he said.
Nor did Stournaras accept that ECB economists could be blamed for failing to anticipate the post-Covid inflation surge, which he said was the result of non-linear supply shocks which would have been impossible to predict.
The ECB's data-dependent, meeting-by-meeting approach is a risk-management strategy at a time of great uncertainty, said the Greek central bank chief, dismissing the idea that it was designed to allow for a potential insurance cut. "If one cut makes no difference, why should I do it?" he said.
Asked if the ECB should enter into accommodative territory, Stournaras noted that fiscal policy will be very expansionary, with EU countries having to raise defence spending towards 5% of GDP, as well as to spend large sums on the green transition. "Why should we enter into accommodating monetary policy when we expect the fiscal side to be, I wouldn't say explosive, but expansionary?" he said.
BALANCE SHEET
The ECB should not make any changes in its quantitative tightening plans, Stournaras said, adding that the runoff of both the Asset Purchase Programme and the Pandemic Emergency Purchase Programme are currently working well.
Nor should the ECB hurry into determining the parameters of its planned Structural Bond Portfolio, despite the continued run down of the balance sheet. "We managed to bring interest rates down at the same time, curtailing our balance sheet, runoff goes well, despite the appreciation of the euro. So, keep fingers crossed," he added.
The SBP will be demand determined by the needs of eurozone banks when excess liquidity is eliminated and that is why is difficult to estimate its size, he said, declining to suggest any optimal size for the balance sheet, though he said that equilibrium liquidity is now higher than before the great financial crisis.