Articles & Interviews

Interview of the Bank of Greece Governor Yannis Stournaras with Econostream and David Barwick

21/03/2025 - Articles & Interviews

Q: Governor, where do things stand?

A: To start with the fiscal expansion, the real decisions are still to come. For now, we have higher bond yields, which is restrictive. The rise is based on expectations of higher debt and deficits, but Germany’s debt and deficit are very low, so it was right to remove the debt brake. That decisioton may signal higher future growth, but it is quite restrictive in terms of financing conditions, so it is an argument to lower interest rates. There's no question about that. As for tariffs, you saw what the ECB President Christine Lagarde said this morning[1] in EU Parliament: short-term inflation may rise if there is retaliation, which seems inescapable, but lower economic activity would dampen inflationary pressures in the medium term. So, we have a stagflationary impact at first, but a deflationary one later on, and this should not distort our policy direction towards lower interest rates. Meanwhile, monetary policy is now meaningfully less restrictive, but still restrictive. So overall, the direction of monetary policy is clear to me. It is towards reducing rates further, and markets agree with that. However, we need our data-dependent, meeting-by-meeting approach now more than ever, so I cannot say whether it's going to be April or June, even if it’s clear to me that we still have some way to go.

Q: What would be a reason not to cut in April?

A: If it was today, I would be more certain that we're going to have a cut, because February inflation was 2.3%, in line with our path, and the materialisation of our forecast also depends on bringing down interest rates more. Also, data from 4Q show wage growth decelerating. Services inflation is down. Core inflation is also down. Everything points in the direction of a cut in April. But this is not April. It is still March. We have one month to go, so I cannot tell you that we're going to cut. And uncertainty is so elevated that it is impossible to say what might happen to change the decision.

Q: Speaking to Malta’s Governor Demarco two days ago, he agreed with the idea that with most information currently pointing to a cut in April, it could be considered the default option.

A: I also agree with that.

Q: In other words, it’s more the case that you need a reason not to cut than a reason to cut. We already have reasons to cut.

A: Yes, definitely. I fully agree with that.

Q: You also said recently that you expect two more cuts and that’s it.

A: Of course, it is not written in stone. It's a judgment about the policy direction, based on current data and the forecasts. But I still believe that we’re going to have two more cuts this year and that 2% will be the terminal rate. I cannot tell you when these two cuts will happen. In a situation of such elevated uncertainty, it wouldn’t be prudent to be so precise.

Q: And the observers who think the ECB will go all the way down to 1.5%?

A: I don’t think this is correct. It’s too extreme, in my humble opinion. Before the European Commission decision and the German debt brake decision, and with a tariff war coming from the other side of the Atlantic, there may have been sufficient economic weakness to get not 1.5%, but perhaps 1.75%. Now, things are different, though we still have elevated uncertainty and there’s still a long way to go to increase growth in Europe without inflation – meaning a Capital Markets Union, deregulation, the Competitiveness Compact, a Banking Union, and so on.

Q: And what information are you looking at between now and April?

A: The dynamics of inflation, underlying inflation and the transmission of monetary policy, then the bank lending survey, but also growth conditions and of course geopolitics. We could also have pleasant surprises, like peace in Ukraine, which would imply even lower energy prices.

Q: And you'll be getting mechanical updates of the forecasts next month. Are you looking at those?

A: Of course, the mechanical updates are one of the elements. We’re looking at the exchange rate also. But for the moment, they all point to a downward direction of policy.

Q: Speaking of the exchange rate, do you have an expectation as to how it will evolve further?

A: I avoid making predictions about the exchange rate, but what I can say is that the initial forecast by analysts of a US dollar appreciation was a mistake. And I continue believing it was a mistake.

Q: When do you think we’ll be back at 2% inflation sustainably?

A: I think at the end of 2025 we will be very close to 2%. The recent decline of energy prices is encouraging. If we have peace in Ukraine, then energy prices will fall even further. Food prices will too, because both Ukraine and Russia produce a lot of wheat. But let’s wait, because we might have tariffs and retaliation that could impede the disinflation process. So, we have to be careful.

Q: And what do you see as the higher risk: undershooting the inflation target or overshooting?

A: I would say we’re now in a 50:50 situation. It could be either undershooting or overshooting, depending on which of the factors that I described prevail. Will it be the tariff/retaliation effect? Will it be the growth effect? The bond yield effect leading to restrictiveness? And don't forget, we have restrictive impulses coming from past monetary policy decisions, and the shrinking of our balance sheet also has an impact.

Q: You were at the ECB Watchers conference last week. In her speech there, Madame Lagarde said the ECB should not amplify uncertainty. A pause in April, unless well justified, would amplify the uncertainty about what the ECB is doing.

A: We have one more month to go and it depends on developments. But we are here to minimise uncertainty. And this is what we have done; in a turbulent world we have managed to achieve a soft landing with much lower inflation. An approach characterised by flexibility and realism has given us good results, and we are going to continue along this line. The climate in the Governing Council is very good. We don't differ too much and will continue to reduce uncertainty and achieve our overriding objective of price stability. We are very, very close to doing that.

Q: And we were recently told by a former colleague of yours that German bond yields of 2.90% or above were an overwhelming reason to cut. Do you agree?

A: Yes, I agree. German bonds were at 2% at the end of December and are now at 2.8%. That is exerting a restrictive impact both on inflation and output. So yes, we take that into account.

Q: What is your view of where the neutral rate is?

A: The neutral rate is a theoretical concept that applies to an equilibrium. But a number that comes out of models cannot be used for monetary policy decisions, because the range between the lower and the higher estimate is large. Our latest study in the ECB suggested a range of 1.75% to 2.25%, so the average is 2%, which is close to what markets believe will be the terminal rate. But economics is not quantum physics; it's a social science. At the end of the day, it’s the Council’s judgment that decides, taking into account everything.

Q: And after one more cut, do you think it will still be fair to say that policy is restrictive, since even then, we'll still be at the very top of the range you mentioned?

A: That will depend on the situation and the data we have on the table when we take this decision. So, I cannot tell you now for sure, but from today’s perspective, yes, I would say that policy could still be restrictive after one more cut.

Q: And do you think the absence of updated forecasts per se makes a pause more likely in April?

A: No, I don't. I mean, we can judge the situation, even if we don't have official forecasts

Q: This announcement that we're expecting from the US on April 2 - how do you incorporate it into the decision on April 17 in the absence of updated forecasts?

A: If we get a 25% tariff, we know it’s going to be mainly growth-reducing. It won't have winners. It will have only losers, I'm afraid, and the US will be a loser as well, not only the rest of the world. But it will curtail demand for exports, and the euro area is a much more open economy than the US, so the impact on growth here will be serious. And with or without updated projections, we have our judgment, and we will discuss it. Of course, our staff is working on this now, feverishly, so we're going to have an idea.

Q: Regarding the German debt brake decision, when will this start showing up in inflation or growth numbers?

A: It will take time. The main decision has been taken in Germany and this is very good, because Germany has very low debt and a small deficit. It needs investment. So, it is good to explore the fiscal space it has. So, it is good news for Europe, and having a negative output gap is not going to have a big impact on inflation.

Q: Will this be in the June forecast in some form?

A: It depends on whether we have definite implementation by the new German government.

Q: So, there's a chance that this would not even affect any decisions directly for a while.

A: Yes, it might take time.

Q: There's been talk recently about the potential for the US to wind up in a recession, which we haven't seen there in a while.

A: We have the Atlanta Fed forecast using these nowcasting models that for the first time are signalling recession in the US. It's a big reversal compared to the past.

Q: That must be one of the things that make you think that the ECB would have to do more rather than less.

A: Yes, of course. It’s another reason why I have no doubt that in the medium term, the trade war will be deflationary everywhere.