Stop the press: A European central banker has been caught telling the truth

By: ECB Watch

Question: How can you tell that a central banker is telling the truth? Answer: When he issues a denial. Greek central bank governor Nicholas Garganas this week denied a report in the Greek newspaper To Vima in which he was quoted as saying something perfectly sensible: “To the degree that the strengthening of the single currency helps ease inflationary pressures, the reasons for a new interest rate increase become more distant.”

 

Who could argue with that? This is in fact a statement that most central bankers can subscribe to. It did cause some strong commotions on the foreign exchange markets, by giving some reprieve to the ever-strengthening euro as the markets began to doubt that interest rates may go above the well-flagged increase to 4% in June. In fact, Garganas’ supposed statement achieved to do two things at the same time: it made the euro less of a one-way bet, and it explained the ECB’s own thinking on the influence of the exchange rate on its own monetary policy decisions. We thought it was particularly well-timed.

 

But, alas, Mr Garganas issued a denial, and we are all much more confused for it. This is what the Bank of Greece said in a statement this week: “Bank of Greece Governor Nicholas C. Garganas emphatically denies making the statements attributed to him in press reports, that a strengthening euro may stop the ECB from raising interest rates further, or to the extent that a strengthening of the single currency helps scale down inflationary pressures, reasons for a new interest rate increase become more distant.”

 

The original statement makes a lot more sense that the denial. In fact, when a central bank assesses whether or not to raise interest rates, it takes the monetary conditions fully into account, and that would obviously have to include the exchange rate. To the extent that the real effective exchange rate appreciates, the pressure for interest rate increases is correspondingly reduced. This is a statement of fact, not opinion. Of course, the euro area is a large economy, and the exchange rate of the euro area matters less for the ECB than the exchange rate of the drachma mattered for the Bank of Greece prior to monetary union. Garganas’ statement, as it was printed in To Vima, is nevertheless a fairly good description of how monetary policy interacts with the exchange rate.

 

So why did he deny it? Of course, it is possible that he never said anything of the kind. The newspaper might have just made it up, though we doubt this. Perhaps the newspaper quoted him incorrectly, or Mr Garganas and the newspaper disagree about the precise wording he used. If he had never spoken to the newspaper, he would probably have mentioned that. If he had something else, he would have mentioned that too. To us, it seemed that what happened that Mr Garganas spoke to a journalist, who quoted him more or less correctly, except that the quote was not authorised. In other words, it was true, but not meant to be published. In some European countries, it is customary that officials who are quoted have to authorise a quote before it can be used. 

 

That is to us the most likely explanation. It suggests that someone, possibly from inside the ECB, may have been breathing down his neck. But it does not change the fact that central banks, including the ECB, ultimately take account of exchange rate movements.

 

In fact, we at Eurointelligence fully agree with Garganas’ original statement. See also our most recent ECB watch on this issue, which we published before Mr Garganas’ speech, and in which we looked at the monetary conditions index for the euro area, which strengthened because of the rise in the euro. We believe that on the current trajectories, the ECB will never get to an interest rate of 4.5%, unless there is an unsuspected outbreak of new inflationary pressures, since the euro/dollar exchange will get in the way beforehand. It appears to us that the ECB does not like to communicate this sentiment at this stage, and may find it useful to keep up the pretence of further monetary tightening beyond June. But such tactics are generally not a good idea because it forces bankers to make unreasonable statements, or in this case, to issue unreasonable denials.

 

 

munchau(at)eurointelligence.com

mundschenk(at)eurointelligence.com

 

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