Speaking at the 5th ECB Simulation Conference, the Governor of the Bank of Greece, Mr. Yannis Stournaras, extensively addressed the measures implemented by the European Central Bank (ECB) to support the Eurozone’s economy during the pandemic, as well as the challenges of transitioning to a “green economy.”

In his speech, Mr.Stournaras made extensive reference to both monetary policy and the extraordinary measures taken by the ECB, such as the PEPP bond purchase programme, but he was careful to stress that for a proper recovery a country cannot rely solely on monetary policy but also needs to implement a correspondingly sound fiscal policy. 

The Governor of the BoG also referred extensively to the issue of climate change and the measures that the ECB has taken in order to record the way in which it affects the financial system, while speaking on the issue of the pandemic he was careful to stress that “we cannot yet say with certainty that we have turned the page“, adding that “in no case should we be complacent. All the competent bodies need to be vigilant in order to effectively manage the consequences of the pandemic. It is essential that they continue to take measures to restore economic prosperity and promote social cohesion for all euro area citizens.”

He devoted an important part of his speech to the transition to a green economy, underlining that “our goal is a modern, robust and green economy, driven by the social well-being of all citizens. And to this effort, the central banks and the Bank of Greece in particular are contributing with all their strengths, within the framework of their mandate“. 

The greeting of Mr. Stournara at the 5th Simulation Conference of the European Central Bank:

It is a particular pleasure for me to be here today and to address the opening of the fifth Simulation Conference of the European Central Bank. I would like to thank all participants for their interest in the functioning and activities of the central bank, as well as the student team “Get Involved” for the impeccable organization of the conference.

I would like to begin by noting that the pandemic, two years after its emergence, continues to threaten lives, cause high uncertainty, and affect the social welfare of all citizens globally. Of course, progress in vaccinations serves as a major factor in curbing the spread of the pandemic and has contributed to the lifting of social distancing measures and the restart of the economy.

However, we cannot yet say with certainty that we have turned the page. The risk of the emergence of severe variants, such as “Omicron,” which we are currently facing, remains high and could lead to new waves of the pandemic, with serious consequences for society and the global economy, including the euro area.

Under no circumstances should we become complacent. All responsible entities need to remain vigilant in effectively managing the consequences of the pandemic. It is essential to continue taking measures to restore economic prosperity and promote social cohesion for all citizens in the euro area.

Regarding monetary policy, I want to emphasize that the Eurosystem is now better prepared, compared to the past, to fulfill its primary mandate: to maintain price stability, ensuring the value of the euro and fostering economic growth and job creation.

Last July, the Governing Council concluded the review of the ECB’s monetary policy strategy. During the review, which began in January 2020, we took into account the fundamental changes that have occurred in the international economic environment since the previous strategy review in 2003. Among these changes are the decline in the so-called “natural rate of interest,” which limits the scope for conventional interest rate policies by central banks, as well as the slowdown in productivity and the reduction in the active population due to the ongoing aging of the population. Furthermore, developments such as climate change, globalization, rapid digital transformation, and the rise of digital currencies affect market functioning and price formation, posing new challenges for central banks.

During the Governing Council’s consultations, we considered numerous analyses and studies prepared by Eurosystem working groups. These works have been published in a series of ECB Occasional Papers, and I encourage you to study them, as they examine a wide range of issues related to the conduct of monetary policy.

Additionally, the ECB and all national central banks of the Eurosystem, in their efforts to understand the views and expectations of the broader public, organized events involving representatives of civil society. At the Bank of Greece, we had the opportunity during the Simulation Conference in December 2020 to learn the opinions of participants on a series of questions regarding prices, the economy, and their expectations from the central bank. Moreover, in February 2021, we organized the event “The Bank of Greece listens to you,” in which representatives of social organizations participated with the aim of engaging in dialogue about the issues that concern them and gaining a better understanding of the role of monetary policy. The summary of all contributions was considered by the Governing Council during the ECB’s strategy review.

The new strategy establishes the fundamental principles that guide us in shaping the direction of monetary policy so that we can respond more effectively to various circumstances and fulfill our primary goal of price stability. At the same time, the strategy provides a clear and consistent reference point for shaping consumer and business expectations regarding future price levels, enabling them to make the best possible decisions concerning their activities.

I will now refer to the most significant conclusions that emerged from the review.

First, the new strategy determines that price stability is best maintained by pursuing a target for inflation of 2% over the medium term. Compared to the previous formulation, which aimed for inflation below but close to 2%, the new approach makes it clear that 2% is not the maximum acceptable level for inflation but our symmetric target. Deviations of inflation from this target, whether negative or positive, are equally undesirable

The redefinition of price stability reflects the need to establish a sufficiently large positive margin for the inflation level considered desirable. Lessons learned from recent crises reinforce the necessity of setting a higher inflation target to provide greater leeway for monetary policy to lower interest rates in cases of deflationary pressures and to avoid episodes where nominal interest rates are constrained by the effective lower bound. Additional factors taken into account in determining the inflation target include differences in inflation levels between countries, downward rigidities in nominal wage adjustments, and the bias in the measurement of the Harmonised Index of Consumer Prices (HICP).

The adoption of a symmetric target contributes to the proper shaping of expectations regarding future policy interest rates and inflation levels. The previously prevailing perception was that the ECB pursued stricter monetary policy when inflation deviated upwards from the target, while it reacted with timid steps and delays to downward deviations. In the current strategy, we emphasize that both sustained price increases and prolonged price declines must be curtailed immediately and to the maximum extent possible.

In the new strategy, we also recognize that when the economy operates near the effective lower bound of nominal interest rates, particularly strong or persistent use of monetary policy measures is required to prevent the entrenchment of negative deviations from the inflation target. This may also entail a transitional period during which inflation moderately exceeds the 2% target.

As such, while confirming that interest rate policy remains the primary instrument of monetary policy, additional tools are employed by the ECB when deemed necessary. These tools include forward guidance on the future trajectory of monetary policy, asset purchase programs, and long-term refinancing operations.

During previous crises and the pandemic, the ECB resorted to extraordinary, less conventional measures, as monetary policy rates had reached historically low levels. Let me remind you that the ECB’s current interest rates have been set at zero for main refinancing operations since March 2016 and at negative levels for deposits held by credit institutions with national central banks since June 2014. The combination of measures taken proved highly effective, playing a crucial role in boosting inflation and fostering economic growth from the very low levels previously observed.

These measures continue to be implemented today to bolster economic growth and stabilize inflation at levels consistent with the target. Furthermore, they succeed in maintaining smooth financial conditions across all eurozone economies, ensuring favorable financing terms and safeguarding the flow of credit to all sectors of the economy.

During the pandemic, the Pandemic Emergency Purchase Programme (PEPP) played a particularly critical role in alleviating financial disruptions and enhancing monetary easing. This program was promptly deployed following the onset of the pandemic, and as announced on December 10, 2020, net monthly purchases will continue at least until March 2022 or until the pandemic crisis is deemed to have passed. The program has been highly effective in containing the rise in government bond yields caused by heightened uncertainty and in narrowing yield spreads between member states. At the same time, it ensures the smooth functioning of the monetary policy transmission mechanism across all eurozone countries.

The effectiveness of the PEPP largely stems from its innovative flexibility in the composition of securities purchased by the Eurosystem. The volume of securities purchased can vary over time, depending on financial conditions. Additionally, the program allows for temporary deviations in the allocation of public sector purchases from the ECB’s capital key, which reflects the economic size of each member state. This flexibility ensures that the monetary policy response is tailored to specific needs and conditions, enhancing the overall stability and cohesion of the eurozone economy.

The PEPP introduced a critical deviation for Greek government bonds, exempting them from the minimum credit rating requirements applicable under the regular Public Sector Purchase Programme (PSPP). This decision significantly mitigated the pandemic’s impact on financial conditions in Greece, ensuring greater economic stability during a period of heightened uncertainty.

Alongside the PEPP, the ECB continued implementing measures introduced prior to the pandemic. Notably, net asset purchases under the Asset Purchase Programme (APP), initiated in 2015 to address the financial crisis, have remained in place. The PSPP, as part of the APP, involves purchasing a substantial share of government bonds. As per the decision of September 12, 2019, these net monthly purchases will persist as long as deemed necessary to support the accommodative stance of monetary policy. They are set to conclude shortly before the ECB Governing Council decides to raise key interest rates.

Simultaneously, the Eurosystem has been providing ample liquidity to banks through monetary policy operations. The Targeted Long-Term Refinancing Operations (TLTRO III), a third series of refinancing measures, are offered under highly favorable terms. These measures aim to bolster bank lending to businesses and households, ensuring low borrowing costs for the private sector.

To further facilitate bank participation in refinancing operations, the ECB announced on April 7, 2020, that eligibility requirements for collateral would be temporarily eased. Greek government bonds, in particular, were accepted as collateral in monetary policy operations. This measure supported the liquidity of Greek banks and enhanced their ability to extend credit during a critical period, safeguarding the flow of financing to the broader economy.

As of the end of November 2021, the total value of securities held by the Eurosystem under the Asset Purchase Programme (APP) and the Pandemic Emergency Purchase Programme (PEPP) exceeded €4.6 trillion. Meanwhile, liquidity provision through refinancing operations reached €2.2 trillion. Consequently, the Eurosystem’s balance sheet expanded significantly from approximately €4.7 trillion in early 2020 to nearly €8.5 trillion by November 2021. Similarly, the balance sheet of the Bank of Greece increased from approximately €110 billion to €230 billion during the same period.

To summarize, during the discussions on the strategy, it was deemed appropriate to utilize the lessons learned from previous crises and to recognize the effectiveness of immediate and substantial monetary intervention through less conventional tools. For this reason, in the revised strategy, it is stated that, in recognition of the lower bound for policy rates, the Governing Council will use these tools as needed, will continue to respond flexibly to new challenges, and will consider new policy instruments when necessary.

Monetary policy decisions are based on the assessment of economic and financial developments, with the simultaneous use of two interdependent analyses. First, the economic analysis, which focuses on macroeconomic projections but is enriched with new types of data and improved macroeconomic models that include the effects of demographic change, climate change, globalization, and digital transformation. Second, the monetary and financial analysis, which emphasizes the functioning of the monetary policy transmission mechanism and assigns a significant role to financial stability.

After completing the strategy review, in the updated press release of the Governing Council’s meeting decisions on July 22, 2021, we revised the forward guidance on the future trajectory of ECB interest rates. Specifically, in alignment with the new strategy, to support the symmetric 2% inflation target, we decided that the key interest rates will remain at their current or lower levels until the following conditions are met: We observe that inflation reaches 2% well ahead of the end of the projection horizon and persists for the rest of the horizon under review, and we judge that the underlying inflation dynamics have made sufficient progress to be consistent with the stabilization of inflation at 2% over the medium term. It was noted that this may also imply a transitional period during which inflation is moderately above target.

For macroeconomic stabilization to be successful, monetary policy needs to continue being complemented by targeted and coordinated fiscal measures. The new strategy recognizes the importance of conducting counter-cyclical fiscal policy to enhance the effectiveness of monetary policy. At this point, it is worth highlighting the unprecedented collective action by the member states of the European Union to combat the pandemic and support the economy.

Τhe main initiatives include providing maximum fiscal flexibility under the Stability and Growth Pact and the agreement on the Multiannual Financial Framework. At the same time, support programs were activated for workers (through the Support to mitigate Unemployment Risks in an Emergency – SURE instrument), businesses (by establishing a pan-European loan fund focusing on small and medium-sized enterprises), and member states (with the key measure being the creation of the Next Generation EU – NGEU recovery fund). The NGEU recovery fund resources can be utilized for loans and grants to governments for developmental actions, with the most significant being those related to the transition to green energy, energy efficiency, digitalization of the public sector and the economy at large, and strengthening the health sector.

Recognizing the need to address the consequences of climate change, the European Union, beyond the funding allocated under the NGEU program, has set a goal to achieve climate neutrality by 2050. The European Green Deal, introduced in 2019, outlines policies to achieve this goal, such as actions to mitigate global temperature rise and reduce greenhouse gas emissions. As an intermediate target, a package of proposals has been established to reduce emissions by at least 55% by 2030 (Fit for 55).

Faced with the challenge of climate change, central banks could not remain neutral, even though climate change is mainly the responsibility of governments. Climate change poses a major challenge to price stability through two channels. First, through natural hazards, as more frequent and more extreme weather events affect the production process and the supply of goods, with effects on price formation. Second, due to the necessary adjustments related to the policies related to the transition to a low-emission economy, production costs may increase and there may be structural changes affecting supply and demand, and ultimately prices.

In reviewing our strategy, the Board of Directors included an ambitious climate-related action plan. With this action plan, the Eurosystem aims, without prejudice to the primary objective of price stability, to ensure that it takes full account of the impact of climate change in the conduct of its monetary policy.

In summary, the following milestones are foreseen on our path towards integrating climate change considerations.

• First, we are gathering the necessary data to analyse the risks associated with climate change. We are also adapting the macroeconomic models to take into account the consequences associated with climate change.

• Second, we examine the exposure of our balance sheet, as well as the balance sheet of the supervised banks, to climate risks. We have already conducted an economy-wide climate change extreme scenario simulation exercise, which showed that the cost to banks and businesses of rapidly adapting to green policies is much lower than the cost of inaction and facing severe natural disasters in the future. 

• Third, we will introduce disclosure requirements for banks and corporations issuing securities so that these securities can be used as collateral in monetary policy operations and private sector securities markets. We are also assessing whether credit rating agencies incorporate climate risks into the credit ratings they provide.

I would also like to stress that the Bank of Greece is one of the first central banks worldwide to address climate change and sustainability, having established, already in 2009, the Climate Change Impact Assessment Committee (CCIA). The CCIAC makes a substantial contribution to research aimed at highlighting the risks and opportunities arising from climate change. In addition, the Bank of Greece established the Climate Change and Sustainability Centre to coordinate and implement the Bank’s climate-related activities. In the context of the recent United Nations Climate Change Conference (COP 26) in Glasgow, the Bank of Greece committed itself to contribute, within its competencies, to the achievement of the objective contained (in Article 2.1(c)) in the Paris Agreement, which provides that financial flows should be made compatible with a path leading to low greenhouse gas emissions and climate-resilient development.

This week, the new temporary exhibition titled “Economy and Climate: Handle with Care” was inaugurated at the Bank of Greece Museum. The aim of this exhibition is to highlight the role of central banks in addressing the impacts of climate change and to enhance public awareness and active engagement, especially among the younger generation like you, in the urgent mobilization required to tackle these challenges.

Our goal is a modern, robust, and green economy, with a focus on the social well-being of all citizens. In this effort, central banks, and particularly the Bank of Greece, contribute with all their resources within the framework of their mandate. In conclusion, I want to express my belief that with the proper coordination of everyone’s efforts, we will be able to contribute to meaningful and sustainable development for a better and more sustainable future.

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