Bank of Greece Gov. Stournaras: Lessons From Experience of Lasting Zero Interest Rates

Influential Bank of Greece (BoG) Gov. Yannis Stournaras detailed what he called the “lessons learnt from the experience of lasting zero interest rates” as well as non-standard monetary policy measures, in an address on Monday at the University of Liverpool.

Among the highlights of his comments, Stournaras, a former finance minister during the country’s punishing bailout era, noted that central bankers have encountered significant challenges over the past 15 years, in ticking off a “laundry list” that includes “global financial turmoil, the euro area’s sovereign debt crisis, a prolonged period of very-low inflation, the pandemic and the outbreak of geopolitical crises along with a series of supply-side shocks.”

“I argue that the monetary policy measures adopted by the ECB during that period — including the lowering of the policy rate to negative levels for a period of eight years — managed to support a sustained progress towards price stability, ensuring at the same time financial stability, and supporting economic welfare,” he underlined, adding:

“That said, there were difficult trade-offs to manage. Over time, low rates and non-standard monetary policy measures may lead to excessive leverage and cause short-term dislocations in financial markets. In addition, as we have recently seen, a pivot in the monetary policy stance to combat higher inflation, can cause losses to central banks because they have to remunerate their liabilities at higher interest rates, while their assets have locked in low yields. Do these losses impair the ability of central banks to apply their preferred monetary policy rules? Do they compromise their independence? I argue they do not.”

Nevertheless, he said important lessons were learnt from the recent experience, namely, macro- and micro-prudential and bank crisis management policies have strengthened, especially with measures to create and enhance a banking union.