Raising interest rates does not address inflation causes, Herodotou says

The Governor of the Central Bank of Cyprus, Constantinos Herodotou, does not side with the hawks in the design of monetary policy in the eurozone and expects that in the long term inflation will move within the targets set by the ECB Governing Council, which is 2 per cent.

In an interview with the US network CNBC, Herodotou, asked about the ECB’s next steps regarding the quantitative easing programme and interest rate setting, pointed to the ECB board meeting in March and the data to be presented on inflation dynamics. The data will determine the decisions. Among the data that will be reviewed is the dynamics of wages, i.e. whether there is an increase.

“We need to see if expectations have changed and if there is wage growth above productivity growth. I think we will have to look at these to decide in March on the termination of the APP (bond purchase programme due to the pandemic) (…) Based on what is recorded, inflation is expected to weaken in the coming years in the eurozone, but also in Cyprus,” Herodotou said.

Herodotou recalled that based on the latest data, inflation will fall in the eurozone in 2023 and 2024.

At the same time, Herodotou expressed the view that the increase in interest rates will be preceded by the termination of the bond market and estimated that a rise in interest rates will not affect the main source of inflationary pressures, which is the increased energy prices and supply disruption in the supply chain.

Regarding the rise in inflation in Cyprus, Herodotou said that it was due to causes similar to those identified in the rest of the euro area, notably the cost of energy.

Regarding the increase in yields on government bonds, he noted that currently, the eurozone economies are more resilient and that the “Next Generation EU” investment project will allow further strengthening of the eurozone economies.