BoG head favors rate restraint

Yannis Stournaras disagrees with colleagues who back a more aggressive ECB policy

BoG head favors rate restraint

Bank of Greece Governor Yannis Stournaras opposes steep interest rate rises and is in favor of a more careful approach, in contrast to some of his colleagues on the European Central Bank’s Governing Council. Stournaras also told a conference in Austria Tuesday that, in his view, “this year, we will see the peak of inflation and a steady deceleration thereafter, inflation will gradually decline in 2023 and converge toward the 2 percent target in 2024.”

Stournaras’ views and comments stand in contrast to calls for aggressive rate rises by other Governing Council members, ahead of that body’s meeting on September 8.

The head of the Netherlands’ central bank, Klaas Knot, and his Estonian colleague Madis Muller said earlier this week that a rate rise of 75 basis points (0.75%) ought at least to be considered, while Bundesbank President Joachim Nagel, true to his institution’s hawkish reputation, also came out in favor of decisive action, touting the benefits of front-loaded, aggressive moves. Already on record in favor of significant rate rises have been Executive Board Member Isabel Schnabel and Banque de France Governor Francois Villeroy.

Markets have totally discounted a 0.50% rate raise, while considering a 0.75% raise highly likely.

In his speech in Austria, Stournaras said that the eurozone faced a perfect inflationary storm, adding that trying to tame prices is complex and difficult, comparing it to facing the Hydra, the nine-headed monster of Greek mythology.

Stournaras said that, while a rapid raising of interest rates is appropriate in demand-driven inflation, as in the US, inflation in the eurozone is supply-driven.

“When inflation is driven by supply-side pressures, an undue tightening of monetary policy would aggravate the negative output effects of the supply side shocks,” Stournaras said.

“The main challenge is how to reduce inflation without causing a sudden drop in GDP and employment. In this environment, the appropriate monetary policy response has in my view been to ride out the succession of supply-side shocks… in a gradual but determined manner, incorporating optionality and flexibility,” he added.

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