Big interest rate hikes ‘risky’

Any further major interest rate hikes by the European Central Bank could cause undue damage to Europe’s economy, Bank of Greece Governor Yannis Stournaras has warned.

The ECB raised interest rates by 75 basis points for the second time in a row in October, but Stournaras had argued for a 50-basis point increase, he pointed out in an interview with Politico.

As he said after the October meeting, the eurozone is facing a supply-side shock in which monetary policy has little influence. In his interview, he pointed out that while the spike in inflation to a record 10.7% can be seen as supporting the case for aggressive tightening, the recent drop in energy prices nevertheless supports lower inflation forecasts and a slower pace of interest rate tightening. “My personal feeling is that inflation next year will be below the 5.5% predicted by our baseline scenario,” he noted.

At the same time, the head of the Bank of Greece underlined the growing risk of recession in the eurozone. “The energy shock will cause a recession. Weakness in Europe, as well as in the US and globally, will lead to further contraction in demand,” he noted. “There are growing risks that the eurozone will be pushed into recession,” he said, citing a range of data, including slowing growth in the third quarter and a sharp decline in business sentiment surveys. “And if the war continues, I see no reason for the economy to recover,” he added.

As far as Greece is concerned, the Bank of Greece’s unfavorable scenario does not predict a recession in the country next year. Stournaras emphasized that the prospects of the Greek economy remain strong and while the central bank expected growth of 3.2% this year, it is revising it to 6% thanks to higher tourism receipts. As he noted, Greece is expected to outperform the eurozone in the coming years.

The Greek central banker also urged the EU to do more to help reduce inflation. “In the current environment monetary policy alone cannot address the current levels of inflation,” he said. “That would make the cost in terms of production much higher.”