ECB’s Holzmann: Recalibration Decision to be Based on December Data

30 October 2020

By David Barwick – FRANKFURT (EconoStream) – The European Central Bank’s decision in December could involve fine-tuning of existing instruments as well as the introduction of a new tool, but in any case will reflect the data available then, ECB Governing Council member Robert Holzmann suggested on Friday.

In an interview with Bloomberg, Holzmann, who is Governor of the Austrian National Bank, said that a reading of ECB President Christine Lagarde’s comments on Thursday to mean more stimulus in December would be a ‘correct interpretation’, he said, but ‘with some caveats’.

One of these is that the ECB’s actions would be based on the staff macroeconomic projections to be updated at the same time, he said. ‘What we’ve decided is to make preparations to go through our whole portfolio and see in what area we need to recalibrate to be ready for December, but the decision will be based on December data’, he explained.

Holzmann suggested that the decision would reflect a desire to be more efficient. Although everyone agreed that the pandemic emergency purchase programme (PEPP) was preventing market fragmentation, he said, ‘as regards to the mere quantity of liquidity, there’s an emerging consensus that liquidity by itself doesn’t do the trick, because the prices don’t go up.’

It is therefore a question of what the ECB can do ‘with the structure’, he continued. ‘We want to have the system more efficient.’

Moreover, besides the PEPP and the targeted longer-term lending operations (TLTROs), ‘we have new instruments’, he said. ‘What we see is we have to be a bit more disaggregated in our approach … And it’s not only the quantity, because … we put a lot of money on the table, but the inflation hardly moved.’

As for the new instruments, ‘this can be anything’, he said. On the other hand, while interest rates will figure in the discussion, ‘from what I currently see … there is no productivity, there’s little effectiveness of an interest change’.

Holzmann observed that the current lockdown measures sought to preserve economic activity to a greater degree than the first suite of public health policy reactions to the pandemic. A double-dip recession will thus hopefully not occur, he said.

‘There will be a weakening … but it won’t be a recession as deep as we had it … in the second quarter’, he said. ‘This is something all countries tried to avoid.’

Asked if the consensus view on the Governing Council was that the economic weakening wouldn’t be as severe as many fear, Holzmann said that ‘there was of course a discussion how much the recent events will change our main projections.’

Although current developments do not constitute ‘too much’ of a deviation from projections, ‘there may be deviations, but we do everything to make sure that it remains at the level what we had envisaged or not too far away from that’, he said.

Queried about Italian spreads, Holzmann minimized the latest developments but observed that asset purchases made under the PEPP could be adjusted with respect to time to counter fragmentation. However, he said, the market reaction ‘doesn’t signal any kind of market fragmentation.’