Interview of the Bank of Greece Governor Yannis Stournaras with Reuters
24/02/2022 - Articles & Interviews
Q: After your last policy meeting markets started anticipating the ECB would announce a faster pace of tapering at its March 10 meeting, paving the way for a rate hike. But the situation in Ukraine has since escalated. How is that changing your calculus?
A: The situation in Ukraine increases uncertainty. In my view it is going to have a short-term inflationary effect – that is prices will increase due to higher energy costs. As you know, Europe depends on natural gas from Russia in the order of 40%. But in the medium to long term, I think that the consequences will be deflationary through adverse trade effects, and of course through the rise in energy prices. So, I would urge caution. I am not sure that we need to add to the existing uncertainty that has been created due to the situation in Ukraine
Q: What do you mean by caution?
A: Caution means in my view that we should not deviate much from our December decision. We’ll have to review the new evidence and forecasts in March before we make a decision. The situation is much more uncertain now than it was one week ago. In my view our forward guidance, reviewed under the new evidence we have in March, should be our guide: we should retain the sequencing and to carefully consider the conditions that have to be met before we change our monetary policy stance.
More generally, I am not sure at all that the deflationary tendencies that we observed for several years before the pandemic have changed dramatically because of the pandemic. We simply have had a series of supply-side shocks plus a geopolitical shock now. Monetary policy is not well suited to tackle these shocks. It can do it but at a very high cost in terms of output and employment. That’s why I would urge caution.
Q: But will the situation in Ukraine even be reflected in your forecasts?
A: Yes, I think we should take into account the situation in Ukraine. It will have first and second round effects. We don’t know which kind of sanctions will exist in the medium term. Uncertainty is on the rise, so definitely our forecasts must take into account this situation that has worsened recently.
Q: The ECB left the Asset Purchase Programme open-ended but some of your colleagues have openly talked about putting an end date on it. Do you think that time has come?
A: Before we see the evidence and the new forecasts, I think it would be premature to say anything. Judging the situation from today’s point of view, I would rather favour a continuation of the APP at least until the end of the year, beyond September, rather than bringing the end closer. That’s part of the caution I was talking about.
Q: So, would you keep the guidance as it is, which de facto means APP until the end of the year?
A: Yes, exactly. We should keep our flexibility. That’s the name of the game at this juncture. The colleagues you mentioned spoke before the Ukraine crisis if I remember well.
Q: What do you mean by flexibility in this context?
A: On the Governing Council we talk about flexibility and optionality, which means we keep our options open. We don’t know what kind of sanctions we’re going to have.
Q: So, in this specific case flexibility means not announcing the end of APP on March 10. Is that right?
A: Yes, I wouldn’t be in favour of announcing the end of APP in March.
Q: You’ve mentioned the forecasts a few times. However, they’ve been off by a quite a bit recently. Clearly, it’s quite difficult to model the current situation. So why put so much emphasis on something which has proven unreliable?
A: I do have confidence in our staff both at the ECB level and at the NCBs. Predicting inflation is not an easy exercise. Economics is not an exact science, nor is monetary policy. It’s both an art and a science. Who could have imagined that we would have a pandemic? Who could have imagined supply-side shocks? And now we have a geopolitical supply-side shock. We could not have imagined it. There is uncertainty here that cannot be incorporated in our models. It has nothing to do with the ability of our staff. We have the best models in the world and the best academic advice in the world but inflation forecasting remains an imprecise science which needs judgement. That’s what we’re trying to do in the Governing Council.
Q: There’s a part of the statement that feels a bit out of date, which is when you say rates are expected to be “at their present or lower level”. Given that the market is even expecting rate increase, would you be in favour of at least taking “lower” out?
A: Yes, I don’t think that keeping “lower” now serves any purpose. We could remove that word.
Q: Would you go as far as introducing a hawkish bias by saying “or higher”?
A: I would avoid introducing a hawkish bias, yes. We don’t know the effects we might have, deflationary effects sooner than the medium term. Markets are volatile, the volatility indices have been up in the last two or three days and I would be wary of adding to that volatility.
Q: Some of your colleagues openly talked about a rate increase in the fourth or even third quarter of the year and one even put a number on it: 25 basis points. When do you expect the ECB to raise rates and by how much?
A: The credibility of the ECB is extremely important. For the moment the evidence - and by that I mean second-round effects, labour market and inflation expectations - shows that in the medium term expectations are well anchored at 2% or below. This hasn’t changed. If that changes, I would not hesitate to urge changing our monetary policy stance. But I don’t see the need for that now. On the contrary, we need to show calmness and try to review all the evidence very carefully.
Q: Another couple of words that might prove problematic is “shortly before” when it comes to separating the end of APP from the interest rate hike. One of your colleagues did say it’s time to get rid of “shortly” because it creates undue expectations for an imminent move. Do you think that would be an appropriate change in the language?
A: I would agree with that. It would increase our flexibility and our options.
Q: When the time comes for a rate hike, do you see value, for example in terms of financial stability and of containing the side effects of negative rates, in getting the DFR back to zero and narrow the corridor between it and the MRO that was opened six years ago?
A: I haven’t thought about that and we haven’t discussed it. In front of us we have a tightening of policy that will come through the repayment of TLTRO, because the favourable interest-rate conditions will very likely end in June. We may start to see TLTRO repayments so we will have a de facto tightening of policy and a reduction of the balance sheet.
Q: Do you think that there is value in bringing the DFR to zero faster than you brought it down?
A: We haven’t considered the pros and cons of a fast versus a gradual convergence to zero.
Q: Some ECB watchers think there’s value in bringing the DFR back to zero and then signalling a pause. Is that even feasible?
A: It’s not in our immediate concerns and we haven’t thought about it in the Governing Council or in the analysis we have done with our staff.
Q: Do you think you need to change the tiering multiplier in March?
A: I don’t think this is the right time for such a move. It’s not our immediate concern to change the tiering multiplier.
Q: How are you factoring housing costs into your decisions given that it would now be adding a significant amount to inflation?
A: Is it an inflationary element or a one-off effect? I think it’s only a one-off. When we introduce housing costs in a more proper way, it would be a one-off effect and not a continuous impact. It would not increase prices continuously. I don’t think it’s such a serious argument now to alter our approach.
There are megatrends at play when it comes to inflation. Before the pandemic, we said there are structural factors that keep inflation very low or even negative. That’s why the natural real interest rate is negative. I’m trying to understand what has changed. I’m not sure that the deflationary bias has changed into an inflationary bias because of the pandemic. Do we observe any different trends in investment or savings? Has the savings glut disappeared? Has digitalization changed productivity growth? What’s the impact of green transition? These are more important questions than housing costs.
Q: What’s your view on the notion of greenflation?
A: Bank of Greece research shows that in the long term, green energy will result in lower energy costs than fossil fuels. But until then, there is a transition and we have made a small mistake in this transition. We have rightly imposed very ambitious targets on green energy but didn’t make sure we have enough storage capacity for this green energy. This is perhaps what creates the high transition cost and explains our dependence on natural gas.