Q: What kind of impact do you expect on the European economy from the war in Palestine?
A: First of all, it's a reminder that we should take the geopolitical uncertainty in our calculations. Of course it's very early to say what is going to be the impact, it will depend on the duration, it will depend on whether it's going to be extended or it's going to be local. So it's still very early to say what's going to be the impact, but usually, the impact of such conflicts is mostly stagflationairy.
Q: One immediate effect was a rebound in oil and gas prices. Should we brace for second round effects?
A: Yes, the first impact was rising oil prices and then the prices fell. But as I said, it's very early to say that this is going to be a medium term effect. We see no second round effects from the energy crisis which emerged after the unjustified invasion of Russia into Ukraine. So, up to now, second round effects are limited. So I hope that second round effects will remain limited even in this new geopolitical turmoil. And in any case, the European economy is much different now, as far as energy is concerned, compared to the situation in the '70s. So it's less dependent on energy. I mean, the energy intensity of our GDP is much less now compared to the '70s. But of course, there is an impact, yes.
Q: More broadly, how should central bankers think about this new geopolitical set-up, in which the West is more forcefully challenged by rival powers (Russia, Iran, China...) on a number of fronts (military, financial, technological...)? How can Europe, and the euro currency, navigate this new balance of power?
A: I think for Europe this is again a reminder that it should act in unison as much as possible and as it did during the pandemic, for instance. So this is another instance which shows that it is very important for Europe to coordinate and to act together. This is a lesson at least that we have learned from the past.
Q: Long-term bond yields have risen considerably since the last ECB Governing Council meeting in mid-September. How does this further tightening of financing conditions affect your outlook for the economy?
A: As you said correctly, this is tightening. The rise in bond yields means that financial conditions are even tighter Than before given monetary policy decisions. There are many reasons why this happened. One reason is that the markets now are convinced that interest rates will remain in the tightening territory for a number of months. The second is about the fiscal situation in many jurisdictions worldwide. The third is a reaction to the supply and demand of bonds and in particular government bonds as a consequence of increasing deficits on the supply side, and as a consequence of quantitative tightening by central banks, which reduces demand for government bonds. So, it's a combination of factors but at the end of the day, it's correct what you said it means we have even tighter financial conditions.
Q: When do you expect the ECB to start cutting interest rates?
A: It's very early to say, it's very early as you see there is a lot of uncertainty, there's a new shock, this conflict in Israel and Palestine so we have to be very careful, very much data dependent. We should not overreact. So far, I think we performed rather well despite the criticism. I think we managed to have more or less soft landing in our economies despite the various shocks and I hope that this will continue in the future. Of course my hope and my wish is that will avoid the bloodshed in the Middle East.
Q: The market has pencilled in a cut for June or July. Is that reasonable in your view?
A: Well, I don't want to judge market assumptions. Market reacts to signals we provide. It will depend on the evolution of inflation, of financial tightening and of course on the performance of the real economy.
Q: The rise in bond yields was particularly strong in Italy, where the government raised its budget deficit targets. How concerned are you about fragmentation?
A: I don't think we have a red alert in Europe regarding fragmentation, but that is a reminder that member states in the Eurozone should abide by the agreements they have with the European Commission. I'm saying the agreements because the new Stability and Growth Pact is not yet in place, so what is going to be important are the bilateral agreements between member states and the European Commission. But definitely the situation in Italy does not raise any particular worries at the moment, but provided that the Italian government will consult with the European Commission and reassure investors that it will continue to abide by the agreement that the government has with the European Commission on the budget deficit.
A: At what point do you think the ECB should intervene using PEPP?
Q: Well, as you know, PEPP flexibility is here to stay. The implementation has to be discussed in the Governing Council of the ECB who have not discussed it yet. There is no change. So the rules we have decided they still apply. It is a first line of defence. But as I said, there is no urgency, we have no concerns at the moment regarding Italy or any other member state.
A: Do you agree with some of your colleagues who think the ECB should not intervene because Italy has been the cause of its own woes?
Q: As I said, we have not discussed in the Governing Council so I'm not going to comment on informal discussions, or bilateral discussions. Officially we have not discussed the situation in Italy in the Governing Council of the ECB. But as I said, I see no reason for concern. I'm sure that the Italian government will abide by the rules and the agreement they have with the European Commission.
Q: Do you see value in bringing forward the end of PEPP reinvestments, currently scheduled to run until the end of 2024?
A: No, I see no value in bringing it forward especially now under the new uncertainty we have because of the events in Israel and Palestine. So we need to keep our flexibility and act if necessary by using the PEPP flexibility and it's very early to talk about using the TPI
Q: Would you be in favour of raising banks' reserve requirements in light of the vast amount of excess liquidity that has been created?
A: I think we should act only based on monetary policy reasons and justifications. And for the moment I see no reason why we should tighten monetary policy now because increasing the minimum requirements will imply monetary policy tightening. I see no reason for that. Still, there are decisions which will impact the economy with a lag as you know, monetary policy decisions act with an 18 months or a two year lag on the real economy, on the financial conditions. So, we have a pipeline of monetary policy tightening which has been decided in the past. So I see really no reason why we should take a new decision which will tighten monetary policy even more in the face of a weak European economy in particular.
Q: What do you see as the main pros and cons?
A: Well I see more negative than positive points here. I mean, first of all, increasing the minimum reserve requirement is contrary to what other central banks are doing. So it's rather outdated measure. We have to take this into account but in any case, we have not discussed it yet in the in the Governing Council. So, we should not preempt to announce any kind of decisions which have not been taken or any kind of ideas which have not been discussed or have not been discussed extensively at least.
Q: What would be in your view an appropriate level of mandatory reserves?
A: That's a very theoretical question and I wouldn't answer it.
Q: Have you given any thought to the new policy framework?
A: No, I think it's quite early. We still work under the existing policy framework, which serves well our purposes so I think it's too early to talk about changing the monetary policy framework.
(Reporting By Leftheris Papadimas; Writing By Francesco Canepa)
