Monetary policy has to stay the course, Bundesbank head says during Cyprus visit | Cyprus Mail

CBC Governor Discusses Evolving European Economy and Monetary Policies

The governor of the Central Bank of Cyprus (CBC), Constantinos Herodotou, highlighted the nuances of the evolving European economy and the impacts of prevailing monetary policies during a conference hosted by the CBC. The conference took place during an official visit by Joachim Nagel, the president of Deutsche Bundesbank.

European Economy Shifts Post-Pandemic

Governor Herodotou opened the conference by expressing appreciation for Nagel’s presence and esteemed insights. He emphasized the notable economic shifts in the euro area following the pandemic. The transition from goods to services in 2022 caused a deceleration in manufacturing, which affected the euro area’s GDP growth in 2023. Herodotou stated that the shift towards services played a crucial role in bolstering GDP growth.

• Growth of 8.1% in contact-intensive services in 2022
• Slowdown in these sectors starting in August 2023

Herodotou also correlated the resilient services sector with the robust labor market, attributing job retention schemes during the pandemic for preserving the economy’s productive capacity. Despite a significant GDP drop in 2020 due to lockdowns, employment only fell marginally by 1.4%, reflecting the strength of the labor market. However, concerns emerged about the recent trends where employment growth outpaced GDP growth, signaling potential productivity challenges.

• Labor-intensive services and labor hoarding by firms led to a productivity imbalance
• Signs of a labor market slowdown in 2023

Governor Herodotou expressed positivity regarding the economic outlook, noting projections indicating moderated growth in the euro area without a hard landing. Cyprus expects a relatively higher economic growth rate, with a 2.4% increase in 2023 and further rising to 3.1% in 2025.

Inflation Landscape and Green Transition

Addressing inflation, Herodotou highlighted a substantial correction in the euro area’s inflation landscape, dropping to 2.9% in October 2023 from the peak of 10.6% in 2022. He reiterated the ECB’s commitment to maintaining well-anchored inflation expectations, crucial in averting price-wage spirals. The conference also emphasized the imperative to accelerate the green transition amidst the ongoing energy crisis, with policymakers needing to address challenges effectively.

Adaptability of Monetary Policy Actions

Concluding on the ECB’s monetary policy actions, Herodotou emphasized adaptability to meet economic shifts and ensure price stability for a prosperous euro area. He stressed the need for continual policy adaptation in a dynamic economic environment.

Insights from Deutsche Bundesbank President

Joachim Nagel, the president of Deutsche Bundesbank, also shared his insights on the euro area’s economic outlook and prevailing inflation dynamics during the conference.

European Heritage and Economic Challenges

Nagel acknowledged Cyprus’ historical significance and emphasized its deep-rooted cultural heritage and its place at the heart of Europe. He highlighted the importance of understanding common European heritage and its reflection in the euro currency, connecting it to the continent’s historical and cultural richness.

Transitioning to modern economic challenges, Nagel delved into the current state of the euro area’s economy. He cited a period of pronounced weakness characterized by a slight real GDP increase and dampened private consumption and external demand. Projections suggested a moderate recovery in 2024, with real GDP expansion projected at 1% in the next year and 1.5% by 2025.

Maintaining Price Stability

Discussing inflation, Nagel noted a decrease in inflation rates over the next two years but emphasized that they remained at levels considered too high for too long. He highlighted the swift surge in inflation throughout 2021 and the subsequent monetary policy responses to combat this. Nagel also emphasized the need to maintain current interest rate levels to support a return to target inflation and prevent expectations from losing their firm anchoring.

Monetary Policy Actions and Economic Growth

Nagel detailed the measures taken as part of ongoing monetary policy actions, including the halting of asset purchases, interest rate hikes, and balance sheet reductions. He cautioned against premature speculations about lowering interest rates, citing the importance of the future path of interest rates in shaping inflation expectations. Nagel expressed confidence in avoiding a “hard landing” and stressed the need to avoid loosening policy too early to prevent potential stronger tightening measures in the future.

Staying the Course for Price Stability

Concluding his speech, Nagel underlined the importance of staying the course and not easing policy until a sustainable return to price stability is certain.

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