THE European Central Bank it must cut borrowing costs twice before its summer vacation in August and twice more before the end of the year without being swayed by the Fed.
This is what the governor of the Bank of Greece, Yannis Stournaras, said in an interview with Bloomberg, pointing out: “We need to start reducing interest rates soon so that our monetary policy does not become too restrictive. Two rate cuts before the summer holidays are appropriate and four in total during the year seem reasonable. So far, I agree with the markets’ expectations.”
The ECB left policy unchanged last week for a fourth consecutive meeting with most officials agreeing that the right time for the first rate cut is in June. And this, because while inflation does show that it is more and more confidently heading towards 2%, they still need further confirmation before proceeding with reductions.
Based on the schedule, the ECB meets on 11 April, 6 June and 18 July. The August recess follows, and it reconvenes on September 12.
Stournaras is known for his convergence with the doves of the central bank, as the Bloombergthough he recently aligned himself with more hawkish members on the need to wait until June.
“We will have very little new information before the April meeting, especially on wages in early 2024 — but we will get a lot more data before the June meeting,” said Giannis Stournaras, echoing Christine Lagarde on last week. “I think in order to cut rates in April, we would need to see the economy collapse, and I don’t expect that,” he noted.
According to him, “economic growth in the euro area is much weaker than expected and risks are to the downside, while inflation has declined significantly and risks are balanced.”
He also played down strong nominal wage increases, stressing that real wages will not reach pre-pandemic levels before 2025.
“So wages are still approaching, not driving inflation. We should not exaggerate the risk of a wage-price spiral,” he explained. More so as “nominal wage growth moderates and profits absorb some of the wage increases.”
Underlining the need to reduce borrowing costs soon, Stournaras referred to her estimates Bank of Greece that 30% of the tightening brought about by previous rate hikes remains to be seen.
“Furthermore, 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 like interest rate hikes, this in itself leads to tighter economic conditions,” he stressed.
The ECB governor flatly dismissed talk that it could be dangerous if the ECB eases monetary policy before the Fed.
“I don’t agree at all with the argument that we can’t cut interest rates before the Fed does — and almost all of my colleagues do,” he said.
“We are completely independent and the eurozone is a large open economy with a flexible exchange rate,” said Yiannis Stournaras. “We must do what is necessary for the eurozone economy – nothing else.” He added that the situation in the eurozone is “very different” from that of the US, where the economy is also growing thanks to an expansionary fiscal policy and inflation is more persistent. The data for a reduction in interest rates in the eurozone is much more convincing than in the US, he added.
After 2024, the BoE governor said he expects the deposit rate “to gradually decrease to 2% in late 2025 or early 2026,” while adding that “at the moment I don’t see rates falling below 2 % as before the pandemic”.
By reviewing the ECB’s operational framework, he said: “we have taken the lessons of recent years and made the ECB a more modern central bank.”
He pointed out that at the moment no one knows what the appropriate level of bank reserves and 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 that point gradually, step by step, so that we don’t risk any unwanted unrest.”
He expects the ECB’s balance sheet to be smaller than today but larger than in the past, saying “we won’t get to that point in the next one to two years.”
A projected new portfolio of structural bonds “will help stabilize the economy,” he said. The details are still to be discussed, “but the portfolio will also include government bonds,” he clarified. “We will make sure it does not breach the ban on monetary financing in the EU treaty.”
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