(Bloomberg) -- The euro zone is on the cusp of sustainably reaching 2% inflation, putting the onus on officials to avoid undershooting that goal, according to European Central Bank Governing Council member Yannis Stournaras.
Speaking at Birkbeck college in London on Wednesday, the Bank of Greece governor said policymakers can already claim success in taming consumer prices, and should now shift stance to worry more about the risks to economic growth.
“Inflation is now more likely to converge sustainably to the target sooner than earlier expectations — by the beginning of 2025 instead of the last quarter, as was anticipated in the most recent ECB projections,” he said. “Our policy focus may have to increasingly take account of economic conditions so that we don’t undershoot our inflation objective.”
One of the ECB’s doves, Stournaras is at the vanguard of pushing for deeper monetary easing. Policymakers are poised to deliver a fourth cut in borrowing costs next month, but have yet to achieve consensus on how deeply to reduce them in 2025.
For Stournaras, that poses the risk of a delay that could harm economic growth, not least because the full impact of prior tightening has still to be felt. A backdrop of fickle investors doesn’t help.
“Although we have not had any indications of a hard landing, the markets are extremely sensitive to disappointing growth readings,” he said. “If negative surprises for growth come in and we fail to unwind our restrictive monetary-policy stance at the appropriate pace, unnecessary market turbulence could be induced, negatively impacting economic and financial stability.”
The risk then is of both of an undershoot of the 2% target, and greater fallout on the economy than currently envisaged, he added.
“The September reading of inflation at 1.7 percent should be viewed as both a success and a wake-up call,” he said. “A policy-rate path that remains too restrictive for too long could induce an undershooting of our inflation target over the medium term and impede growth. Should that occur, we would risk damaging our credibility.”
The ECB should keep cutting rates in an “orderly” manner, Stournaras said during questions.
Political developments both in Europe and in America also pose threats to the outlook, he observed in his speech.
“An escalation in trade tensions between major economies through tariffs and retaliation could create chaos in international trade and weigh on confidence and economic activity at the global level,” he said.
Such measures would lead to faster inflation in the US, Stournaras said in reply to a question. In the euro zone, it would remain the same, but growth would suffer, causing each economy to diverge even further, he added.
(Updates with remarks starting in ninth paragraph)
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