The experience in monetary policy gained over the previous years has been extremely valuable and can be our guide for the future, Bank of Greece (BoG) Yannis Stournaras said in an article to “Naftemporiki.”
He said that there are two basic principles that must guide our actions: realism and a gradual approach. In this light, monetary policy must remain prudent in order to be able to deal with possible future issues related to price stability.
The four factors that should be taken into account are the following:
- The institutional architecture of the European Union is still incomplete in several areas, such as the Banking Union and the establishment of a framework for managing banking crises and guaranteeing deposits.
- Τhe monetary policy must remain flexible in order to ensure its smooth transmission to the euro area.
- The banking system of the euro zone remains fragmented between, but also within, the countries that make it up.
- Uncertainty remains extremely high internationally, under the influence of adverse geopolitical developments.
In this way, monetary policy can play an important role in limiting the risk of adverse market developments and associated risks of fragmentation, thus helping to safeguard financial stability.
Inflation and interest rates
In the fight to reduce inflation in the euro area, significant progress has been recorded. More specifically, in October 2022 the inflation rate had peaked at 10.6%, while in February 2024 it stood at 2.6%.
This progress has been registered without causing recession or financial instability, suggesting that a “soft landing” of the economy has been achieved. However, the battle against inflation is not yet won, and uncertainty is very high.
Fiscal stability
Financial stability issues must continue to be taken into account by monetary policy makers when making decisions in the pursuit of price stability. This view is reflected in the ECB’s 2021 review of its monetary policy strategy, which recognized that financial stability is a prerequisite for price stability and vice versa.
Banking crises and lessons learnt
The generative causes of the most recent cases of banking crises (Silicon Valley Bank, First Republic Bank, Credit Suisse) are found in inadequacies in risk management, in terms of product mix, concentration risk, the search for returns, mismatches in maturity of receivables – liabilities, etc. Prudent management of such risks is paramount as a first line of defense.
Banking Union
I strongly believe that the more the integration and policy coordination in the Monetary Union proceeds, with the creation of a fully functioning Capital Markets Union and the completion of the Banking Union, which I consider of the utmost importance, the more the resilience of the eurozone economy and its financial system will be strengthened against potential turmoil and adverse geopolitical developments in the future.
