Fiscal support ‘has its limits’

The cautious approach followed by the European Central Bank in the course of normalizing monetary policy is appropriate in the current environment of increased challenges, Bank of Greece Governor Yannis Stournaras noted on Friday.

He added that fiscal support for mitigating the effects of the energy crisis must have “limits” and be targeted so that it does not end up fueling already high inflation.

The Greek central banker’s comments come just days before the ECB’s October 27 meeting, where another big interest rate hike of around 75 basis points is widely expected to be announced as the eurozone faces record double-digit inflation.

The ECB is facing a beast, the central banker claimed, as the effort to tame inflation is complex and difficult. Multiple supply side inflationary shocks are hitting the economy and posing significant challenges to monetary policy, he said in the context of the 13th Economic Forum of Limassol, where he participated via teleconference in a panel together with the central banker of Cyprus, Constantinos Herodotou, and the governor of the central bank of Portugal, Mario Centeno.

Concerning criticism that the ECB has been too slow in responding to rising inflation, Stournaras stressed that monetary policy faced several interrelated challenges. The pace of normalization had to be adjusted so that the ECB’s credibility was not compromised, thereby walking a fine line – it could be neither too fast nor too slow.

“I firmly believe that the path to normalization that we started last December has been properly launched and is based on incoming data, following a step-by-step approach, session by session,” Stournaras stressed.

The Greek central banker underlined that limiting inflation in the current situation requires monetary and fiscal policies that are compatible and provide a clear path to both the desired rate of inflation and debt sustainability, while energy policy should also be partially aligned with the inflation target.

Crucially, fiscal policies should limit the risk of increasing inflationary pressures, while enhancing the effectiveness of public spending. “Fiscal support measures adopted to mitigate the impact of higher energy prices should be temporary and targeted,” he stressed.