European Central Bank Governing Council member George Provopoulos comments on monetary policy, inflation and the region’s debt crisis.
Provopoulos, who heads the Greek central bank, made the remarks in an interview in his office in Athens yesterday.
On whether ECB monetary policy is appropriate for now:
“Yes, it is.”
On negative real interest rates and inflation:
“That’s one reason why I think monetary policy is still very accommodative. But whether real interest rates remain negative depends, in part, on future inflation.”
“I expect that inflation will remain above the 2 percent level in the coming months before falling below that level in late 2011 and in 2012. Current inflation is mainly the outcome of energy prices and the prices of other commodities. We don’t have evidence up to now of second-round effects, while inflation expectations are firmly anchored. We will continue to monitor very closely all developments with respect to upside risks to price stability, to ensure that inflation expectations remain firmly anchored.”
On the ECB’s non-standard measures:
“The non-standard measures are temporary. However, the Governing Council has decided to continue conducting its main refinancing operations and its one-month maintenance period operations as fixed-rate tenders with full allotment for as long as necessary. Further exits from such measures will be decided by the Governing Council at the appropriate time.”
On the economic growth outlook:
“Uncertainty is still elevated, but the growth momentum remains in place.”
On how the ECB can tackle the growth differences across the region:
“It is not the ECB’s role to deal with these differences. They are the result of external and fiscal imbalances and require other kinds of policies to be addressed. These policies mainly involve structural measures to improve competitiveness and fiscal adjustment to crowd-in the private sector.
“Differences in growth rates among regions of a common currency area are normal. Such differences cannot be dealt with through monetary policy. A single monetary policy is required for the entire euro area. Countries with relatively low growth rates -- including my own -- need to improve competitiveness through structural policies and fiscal adjustment, which will boost investment and growth.”
On whether fiscal tensions could change the monetary policy path:
“The single objective of monetary policy is to achieve price stability in the medium term. If there are inflationary pressures we’ll act accordingly, no matter what is happening on the fiscal front.”
On whether Greece can avoid a full-fledged default:
“Of course. The package announced on Thursday was aimed at improving the fiscal sustainability of the country. The debt to GDP ratio will be reduced because of lowering interest rates, lengthening the maturities and by boosting GDP growth. This makes the fiscal position of the country more sustainable.”
On whether there’re enough incentives for a sound fiscal policy:
“We should strengthen governance. In this connection, we should make the procedure under the Stability and Growth Pact more automatic. Indeed, this was one of the outcomes of last week’s summit.”
On contagion risks:
“The decisions announced last week will make a significant contribution to stopping contagion. I am not saying that market volatility will be eliminated immediately since markets tend to overshoot from time to time.
“Nevertheless, I think that last week’s package will lead to calmer markets over time. The package is a big step forward but it is not the only one that is required to reduce market volatility. It is also necessary that countries with large fiscal and external imbalances reduce them. I expect less market volatility as time goes on.”
On when Greece will have full access to sovereign debt markets again:
“It’s very difficult to say at this moment. As the country implements rigorously the program I think this will happen sooner rather than later. It will take some time for Greece to overcome its problems. Our European partners have gone the extra step in providing a new adjustment package. Now, the ball is in our court and we have to work hard, indeed much harder from now on, to implement an ambitious but fully achievable program. And my personal view is we should work so hard that we don’t simply achieve the targets but that we over-achieve them. I have confidence that we will do so.”
On Greece’s consolidation efforts:
“The new package agreed last week by the European Council gives Greece the breathing space to get the program back on track. In my view, we should use the breathing space not only to put the program back on track, but to go beyond the targets of the program. If we did that -- and we certainly can do that -- we would help turn around the psychology of the market. I have no doubt that the government will be successful in fully implementing the program.”
On public support for reforms in Greece:
“The public increasingly understands that it is in their interest -- and the interest of their children -- to implement reforms so that growth can rise again and unemployment can be reduced.”
On Greek banks:
“The Greek banks are not to blame for what happened in this country. In fact, they are the victims of this sovereign crisis and they have been badly affected. First, through the fact that they have been cut off from the markets. Second, because the depressed psychology of depositors led to deposit withdrawals.
“It is important to stress, however, that last week’s summit outcome has led to an improved market psychology and the situation with regard to deposits has been reversed. Indeed, in recent days we have seen an increase in deposits.
“In any case, banks suffered from not being able to access capital markets and losing deposits. Therefore, the only other alternative they had was to increase their dependence on ECB liquidity.
“Now, as you know, Greek banks are in the process of drawing up funding plans. These funding plans will be submitted to us soon and they will be assessed. So we will know on a medium-term basis how the Greek banks will decrease this reliance over the next two to three years.”
On the Greek growth outlook:
“Our forecasts for GDP suggest a smaller recession in 2011 compared to 2010, with GDP falling around minus 3.9 percent. A return to growth, albeit weak (lower than 1 percent), is projected for 2012. Growth will return to its potential rate, which we estimate to be somewhat above 2 percent, in 2013 and beyond. These projections are in line with the revised forecasts of the European Commission and the IMF.”
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