By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Yannis Stournaras said Thursday that policymakers should retain full freedom to move interest rates in either direction as they assessed the medium-term inflation outlook.
“Our decisions remain data-dependent, and we will retain full optionality in either direction, calibrated to the evolving balance of risks,” Stournaras, who heads the Bank of Greece, wrote in an opinion article published on ekathimerini.com.
“What matters is not individual data releases but whether incoming information changes our assessment of the medium-term inflation outlook,” he said.
Stournaras said the ECB would continue to monitor the persistence of services inflation, wage developments and the transmission of past policy decisions.
He said the ECB was also closely watching the risk that the earlier energy-driven shock could feed through more broadly into wage- and price-setting.
Medium-term inflation expectations remained broadly anchored around the ECB’s 2% target, which reflected the credibility of its monetary-policy framework, Stournaras said.
“A de-escalation would be, of course, most welcome, but is not assured,” he said of the Middle East conflict.
Even if de-escalation occurred, lower energy prices would take time to pass through the pricing chain, while policymakers would need to establish that second-round effects had not taken hold in the meantime, Stournaras said.
“The asymmetry matters here: energy prices pass through to headline inflation quickly on the way up, but more slowly on the way down,” he said.
Stournaras said euro area headline inflation had risen to 3.2% in May before unexpectedly easing to 2.8% in June. Core inflation had declined to 2.4% from 2.6%, services inflation to 3.2% from 3.5% and energy inflation to 8.5% from 10.8%, he said.
Economic growth had remained subdued as the conflict weighed on confidence and activity, Stournaras said. Excluding a sharp fall in measured Irish activity, the euro area economy would have grown by 0.3% in the first quarter, supported by domestic demand, he said.
Stournaras said domestic demand was likely to be somewhat weaker than projected in March because uncertainty surrounding the Middle East was weighing on confidence and higher prices were eroding real incomes.
Household balance sheets remained solid overall and consumption should remain the main engine of growth, he said. Private investment would be affected in the near term by volatile energy costs and weaker confidence, partly offset by investment in digital technologies and higher government spending on defense and infrastructure.
The labor market remained resilient, with unemployment near historical lows, while financial conditions had remained orderly despite elevated geopolitical uncertainty, Stournaras said.
“Amid this uncertain environment, our meeting-by-meeting approach has proven its worth,” he said. “Our aim is to keep inflation expectations anchored near our 2% objective over the medium term, in line with our commitment to price stability.”