The pace of monetary policy tightening should be determined appropriately so as not to exacerbate the economic slowdown and not threaten financial stability, warned today the Deputy Governor of the Bank of Greece, Christina Papanikolaou, a day before the European Central Bank (ECB) announced its decision to increase interest rates again.

As she said, speaking at the 6th European Central Bank Simulation Conference by Get Involved, the task is particularly difficult, as monetary policy should inspire stability and confidence that inflation will return to its target in a timely manner. “In this effort, it is important to proceed gradually and prudently. As the former ECB President, Mario Draghi, aptly observed, ‘in a dark room you move with very small steps. You don’t run, but you move anyway’”.

Ms. Papanikolaou argued that when making monetary policy decisions, various factors should be taken into account, such as:

• First, the increased risk of the euro area falling into recession.
• Second, the delays with which decisions already taken are transmitted to inflation and output, as it will take time for the effects of monetary policy normalization measures to fully manifest themselves in the economy. This means that the impact of the measures taken now may manifest themselves when -now- inflationary pressures have, possibly, started to subside.
• Third, the fact that inflation in the euro area stems -primarily- from supply-side shocks.
• Fourth, the fact that the current situation is characterized by a synchronized tightening of monetary policy internationally, potentially leading to synergies that reinforce the aforementioned factors reducing inflation.

In addition, in order to bring inflation back on a downward path, it is necessary, according to her, for other policy actors to cooperate. Fiscal policy has a very important role to play in protecting the most vulnerable groups from high inflation, but it must act in such a way as not to cause a further increase in inflationary pressures.

Fiscal policy measures, as long as they are targeted and temporary, can mitigate the effects of the surge in energy costs, without having a more permanent adverse impact on aggregate demand.

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