BoE is expected to revise down its forecasts for growth and inflation – Stournaras: Central banks cannot be left out of the climate battle – Interest rate cuts are likely to come later than economists discount markets
The Bank of Greece is expected to revise significantly to below projected growth rates for next year in the upcoming December forecasts, as preliminary estimates show.
In an interview with POLITICO, Bank of Greece Governor Giannis Stournaras stated that, according to the Bank’s current estimates, the Greek economy will grow at a rate of 2.4% this year and 2.5% annually in 2023 and 2024.
During the last round of official forecasts for June, the Bank of Greece had estimated a growth rate of 2.2% for the current year, 3.0% for 2024 and 2.7% for 2025.
These figures reflect a significant slowdown in the economy after the strong recovery from the pandemic. GDP in the once troubled eurozone member rose 8.4% in 2021 and 5.6% last year, largely thanks to a recovery in tourism demand after the pandemic. But even if it “slows down”, the Greek economy will still register higher rates than most of its partners in the euro zone.
These growth rates ensure that Greece’s debt/GDP ratio will continue to decline drastically. After peaking well above 200%, public debt as a percentage of GDP is now around 165% and will fall to 144.7% by 2025, according to the Bank’s estimates.
The Bank of Greece is expected to publish its official forecasts in its regular Interim Monetary Policy Report in December.
The updated forecasts also show that inflation it will move into a lower orbit. The preliminary estimate for 2023 remains at 4.3%, but it now looks like inflation will ease to 3.5% in 2024 and 2.2% in 2025, instead of 3.8% and 2.3% respectively, as expected in previous forecasts.
The central bank’s preliminary estimates are slightly more pessimistic in relation to the estimates of the Greek government.
Stournaras: Central banks cannot stay out of the climate battle
Central banks must contribute to the fight against climate change, said Yiannis Stournaras, a member of the Governing Council of the European Central Bank (ECB), dismissing concerns that this could expose them to excessive political pressure.
“We don’t live in an ideal world where the principle of full separation of powers would be applied, in the sense that ‘the government does this and central banks deal with price stability,'” Mr. Stournaras said in an interview with POLITICO yesterday of the 28th United Nations Climate Change Conference (COP28) in Dubai. “The undertaking is huge and everyone’s participation is required.”
Greece in recent summers has experienced extreme weather events, some of the most destructive ever seen, with fires raging near the capital, Athens, as well as in the country’s iconic tourist destinations. These phenomena demonstrate why the Bank of Greece and the ECB in general are devoting more and more resources to assessing the economic effects of climate change and consequently its importance for monetary policy.
“The cost of climate change is very high”, emphasized Mr. Stournaras. According to a study prepared at the Bank of Greece and based on models – it was the first attempt by a central bank to quantify the effects of climate change – the damages by the end of this century are estimated at around 200 billion euros. In the fifteen years since then, experience has “vindicated” the estimates of these models, according to Mr Stournara.
Based on the models, the cost to the Greek economy due to climate change is estimated at €2.6 billion per year on average, much higher than the estimated cost (€1.7 billion) caused by the fires and floods that hit this Mediterranean country between January and August 2023.
With these numerical data, it is natural that Mr. Stournaras supports in all tones the need to “green” the asset portfolios held by the ECB, which implies a preference for securities issued with the express purpose of financing investments in the green transition to the effort to disengage from fossil fuels.
Such an action on the part of the ECB also entails some risks. Other members of the Board, such as the Belgian Governor Mr. Pierre Wunsch, have questioned its feasibility, considering that it would probably amount to imposing an additional tax on certain businesses, in addition to what has been agreed by elected bodies of the state (Mr. Wunsch stresses that in general it “fully” supports the fight against climate change).
In a move that illustrates how quickly green strategies and policies can turn into political pressure, more than ten NGOs have in a joint letter asked the King of Belgium not to renew Mr. Wunsch’s term and to appoint in his place a commander “equipped to meet the challenges of climate change”.
Mr. Stournaras has himself been the target of political attacks. Having helped Greece overcome the public debt crisis a decade ago, he stresses that public officials must not shy away from criticism and counter it with sound arguments.
ECB “dove” likely to cut interest rates later than markets are discounting
The European Central Bank is not likely to start interest rate cuts before mid-2024, ECB Governing Council member Yiannis Stournaras said, while markets are instead discounting a first rate cut in April.
This comment, coming from the leading moderate within the ECB Governing Council, is the clearest indication yet that the ECB will maintain a tight monetary policy stance in the first two quarters of next year as it watches whether wage developments carry the risk of maintaining inflation at excessively high levels.
“Current market indicators, discounting a rate cut in April, look somewhat optimistic,” the Governor of the Bank of Greece said in an interview with POLITICO. He predicts that the first interest rate cut will take place in “the middle of next year” if by then inflation has reached a level slightly below 3% and shows a continuous trend of reduction to 2%.
Mr. Stournaras’ colleagues on the ECB’s Governing Council have avoided any public discussion of a first rate cut in an effort not to send a message of over-optimism or, even worse, “complacency”, thereby encouraging an “unwanted “, according to the ECB, “relaxation of financial conditions” in the bond and money markets.
“In some countries, central bank governors have been criticized about the credibility of their policy, that they lost the battle with inflation from the beginning,” said Mr Stournaras, who is one of the most senior members of the Governing Council. “That made us a bit afraid of sounding overly optimistic,” he said, but “I’m not afraid to speak my mind. I expressed my views in the Hellenic Parliament when Athens was burning. Today I feel much more comfortable talking about the outlook for inflation and about rate cuts.”
Mr. Stournaras argued that the President of the ECB seems to share his view on the timing of a first interest rate cut.
“Mrs Lagarde implied that we cannot cut interest rates in the next two quarters,” Mr Stournaras said, referring to the recent informal return to forward guidance. “This means that at the beginning of the third quarter of 2024 maybe we could,” he added. “This is my interpretation”
The ECB, at its latest Governing Council meeting, kept its deposit facility rate unchanged at an unprecedented 4%, ending its most aggressive tightening cycle in time, after previous rate hikes had helped tame inflation to 2.9 % in October, down from a peak of 10.8% in 2022. At the same time, however, monetary policy tightening has pushed the eurozone economy to the brink of recession, with GDP stagnating over the summer.
Mr. Stournaras believes that further tightening should not be sought using other tools. In particular, if the reduction of the portfolio of bonds acquired through the PEPP program starts earlier than the end of 2024 that we have announced in our guidance, “we will be in breach of a commitment and this would damage our credibility and therefore the effectiveness of our policy ».
On Monday Ms Lagarde told the European Parliament that the Governing Council would consider this option in the “not too distant future”.
The landing of the economy risks not being so smooth
Mr. Stournaras, economist, graduate of the University of Oxford, remains optimistic that the ECB will be able to lead the economy to a smooth landing.
“The negative scenarios heard a year and a half ago have not been verified,” Mr. Stournaras emphasized. “The numbers are not impressive in terms of growth, but…inflation is easing, inflation expectations are firming around 2% and so far there is limited evidence of inflationary spillovers. So far we’re doing well.”
Nevertheless, Mr. Stournaras pointed out that downside risks to the growth outlook have increased in recent months and he fears a possible deterioration in the future.
When interest rates rise faster than the growth rate of the economy, that is traditionally a sign that we are going to be in trouble, Mr. Stournaras noted, especially in an environment of continued high geopolitical risks.
“The combination of these two creates an explosive situation for public debt on the one hand and stagnant inflation on the other,” said Mr Stournaras.
“We need very careful interventions by central banks and governments.”
The rise of populism brings back unpleasant memories
Such interventions seem increasingly difficult to come by at a time when the US has reversed globalization and on our own continent Euroscepticism is reviving.
Mr. Stournaras, initially as Minister of Finance and then as Governor of the central bank, has direct experience of what happens when the integrity of the euro zone is called into question. Today he is troubled by the recent rise in Euroscepticism, and the fact that last week Geert Wilders’ right-wing populist party emerged as the first force in the Dutch parliament.
“Populism offers easy answers,” he says, recalling January 2015, when the Greek people, tormented by the crisis, elected the anti-memorandum party SYRIZA under the leadership of Alexis Tsipras. While promising to end austerity measures imposed by the country’s creditors, Tsipras was forced to agree to even more onerous terms six months after his bluff failed in negotiations with the so-called Troika (ECB, IMF and European Commission).
“The people chose a solution that created more problems than it solved. Only much later did the country realize how much time it had lost,” said Mr. Stournaras.
Today, a decade later, Greece is now a “success story”: It regained an investment grade credit rating and records one of the highest growth rates in the monetary union. But it cannot face the challenges without its European partners, Mr. Stournaras said, concluding: “All the big challenges I can imagine require more Europe, not less.”
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