ECB set to keep rates steady, says Central Bank of Cyprus governor

No interest hikes are expected in the next European Central Bank Governing Council meeting, as the latest available recent data suggest that the ECB rates have reached a level that, if maintained, will contribute to the return of inflation to the medium-term target of 2%, Constantinos Herodotou, Governor of the Central Bank of Cyprus and ECB Governing Council member told CNA on Wednesday.

Speaking to CNA ahead of the ECB Governing Council meeting to be held in Athens next week, Herodotou said the ECB’s primary target is price stability which has been set at a medium-term inflation rate of 2%.

The ECB, he added, went from the absolute accommodative stance of the past years, aiming to boost economic activity, to a more neutral level and then entered in a restrictive cycle in a bid to contain inflation which if remained unchecked would hit households and businesses even more.

In this context, since July 2022, the ECB has hiked its basic interest rate ten consecutive times or by a cumulative 450 basis points.

“I believe since the last hike in September, and on the basis of the latest economic data at our disposal, it is rational to expect that we’ve reached a level where, if interest rates are maintained, price stability will revert to the level of 2% in the medium-term,” Herodotou told CNA.

Highlighting the importance over a data-dependent stance, Herodotou said however that the impact of developments in the Middle East, apart from the tragic toll on human life, should be examined from an economic standpoint as well.

“But based on the latest available data, it would be rational not to expect a decision over a rate hike in the October (ECB monetary policy) meeting,” the CBC Governor said.

Furthermore, replying to a question, Herodotou said that given the ECB decisions, there is still sizeable monetary policy transmission which has not been passed on the economy of the Euro area, recalling that full monetary policy transmission to the Eurozone member-states has a time lag of approximately 18 months.

Responding to a question on the data to be monitored by the ECB, Herodotou said the ECB Governing Council examines three basis criteria in charting its monetary policy stance and namely, the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission.

Asked whether the ECB is looking into the Euro’s exchange rate over the US dollar, although not in the ECB’s mandate, Herodotou said the ECB is scrutinising all data that could affect the above three basic criteria.

We are looking into the developments in the world’s significant economies and other main financial markets to assess how they affect the Euro area’s economy and the ECB’s primary criteria which are central to its monetary policy stance.

“Although (the Euro exchange rate) is not part of the policy, the exchange rate has an impact on inflation and consequently we are looking on how this feeds into to our criteria assessment. But we are evaluating the exchange rate impact we don’t target at the exchange rate per se,” he added.

Responding to a question on the coordination of monetary policy with fiscal policy, Herodotou said this is “very important.”

“And by coordination, we mean that fiscal policy should not include horizontal fiscal measures which are inflationary,” he said, noting that targeted support to vulnerable households and to those in need should be preferred.

“Horizontal measures touching on the entirety of the population are inflationary,” Herodotou concluded.