Francesco Canepa, Balazs Coranyi

FRANKFURT – Yannis Stournaras from the European Central Bank said that the bank should keep its programme of bond-buying stimulation at least to the end, and leave it open for future years in order to offset any possible fallouts from any conflict in Ukraine.

His explanation of how Ukraine’s events, which raise fears about a Russian invasion, could affect the plans of the euro zone central banks to cut its asset purchases, and to increase interest rates in order to control high inflation was the first ECB official.

Stournaras, the chief of the Greek central bank, said that the ECB must not only take rate cuts off its table, but should also allow for greater flexibility in determining the time and date of any future hikes.

Investors expect the ECB will announce that it is ending its Asset Purchase Programme (APP), paving the path for a rate rise by the end.

Stournaras, however, stated that the economic outlook is now “much less certain”, so the ECB needs to be cautious.

He said, “When I look at the current situation, I’d rather have the APP continue for the least amount of time, above September,” he added.

“I would not be in favor of announcing that APP will end in March.”

Europe depends on Russia to meet approximately 40% of its requirements and also imports cereals from Ukraine and Russia.

Stournaras claimed that after the initial spike, the crisis will depress the prices for the long and medium-term.

“In my view it is going to have a short-term inflationary effect – that is prices will increase due to higher energy costs,” Stournaras said.

But I believe that in the medium-to-long term, the effects will be deflationary due to adverse trade effects as well as the increase in energy prices.

OPTIONS OPEN

In December, the ECB stated that it will run its APP until October, and then end it “shortly prior to” increasing interest rates.

Traders had been adding 50 basis points of increases to the ECB deposit rate until recent times. This would bring it down to zero after eight long years of being negative. However, they have trimmed their bets in the wake the escalation occurring in Ukraine.

Stournaras is one of those “doves” who favor lower interest rates at the ECB. The 25 member Governing Council members, including Stournaras and Francois Villeroy-de Galhau suggested that the central banks should “increase its (its?) flexibility” by taking “shortly out” from their guidance.

He supported changing the ECB policy message that rates would remain at their current or lower levels. This is to exclude a rate cut, but not to open the doors to an increase.

According to the Greek governor, he was still convinced of the disappearance of the deflationary tendencies that existed in the euro area for many years prior to the outbreaks.

The current extremely high inflation in the eurozone – 5.1% in Jan – was attributed to “a number of supply shocks”.

He said that “Monetary policies are not well-suited to deal with these shocks.” It can, but it comes at a high price in terms of employment and output. It’s for this reason that I advise caution.”