The European Central Bank (ECB) should continue its bond-buying program at least until the end of the year and not commit to the time it will end to reduce the impact of the conflict on Ukrainesaid the Governor of the Bank of Greece, Giannis Stournaras, in an interview with Reuters.
According to Reuters, Mr Stournaras is the first official to discuss how developments in Ukraine could affect the ECB’s plans to end bond markets and raise interest rates to tackle high inflation.
Mr Stournaras said the ECB should formally remove interest rates from the table, but also allow for more flexibility on when to raise them.
Investors expect the ECB to announce its intention to end its regular bond buying program (APP) at its next meeting on March 10, paving the way for raising interest rates by the end of the year.
However, the Greek central banker said that the economic outlook is now “much more uncertain”, which means that the ECB should be especially careful.
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“Judging by the current situation, I would rather continue the APP at least until the end of the year, beyond September, rather than hasten its termination. “I would not be in favor of announcing the end of the APP in March,” he noted.
Europe is dependent on Russia for about 40% of its gas needs and imports grain from Russia and Ukraine.
Mr Stournaras said the crisis was expected to push prices “in the medium to long term” after an initial peak. “In my opinion, it will have a short-term effect on inflation – that is, prices will rise due to higher energy costs. “In the medium to long term, however, I believe the impact will be deflationary through the adverse impact on trade and, of course, through rising energy prices.”
The ECB announced in December that it would continue the APP program until at least October and would stop “shortly before” interest rate hikes. Until recently, money market players had been anticipating an increase in the ECB’s deposit acceptance rate by 50 basis points (half a percentage point) to zero after eight years in negative territory, although they have reduced those bets following the escalation of the Ukrainian crisis.
Mr Stournaras said the ECB needed to “increase its flexibility” by removing it “soon” from the direction of its monetary policy, as suggested by French central banker Villeroy de Gallo.
He also supported the change in the ECB’s message that interest rates would remain “at current or lower levels” in order to rule out a reduction in interest rates, but without opening the door to an increase.
The Greek central banker noted that he is not yet convinced that the deflationary trend that prevailed in the Eurozone for several years has been eliminated, while he attributed the current, very high inflation – which reached 5.1% in January, in a “series of shocks from supply side “.
“Monetary policy is not good enough to deal with these shocks. It can do so, but at a very high cost in terms of production and employment. That is why I would ask for attention, “he said.
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