ECB Brief: Holzmann Comments on PEPP End, Inflation

14 June, 2021

By David Barwick – FRANKFURT (Econostream) – This is a quick take on comments made Monday by European Central Bank Governing Council member Robert Holzmann, Governor of the Austrian National Bank:

  • Notes that a continuation of the PEPP beyond next March would require a new decision, without which the PEPP will end according to plan – no new information, but on balance the unspoken suggestion is that there is reason to think the PEPP will end, given the hurdle of a contrary decision. Holzmann's willingness to point this out, even if it is just a fact, also contrasts with Lagarde's comment earlier that 'it is far too early to debate these issues'. As such, it may portend stiffer resistance from the hawks to ongoing ECB dovishness.
  • Suggests that it would take another wave of the pandemic to change the scheduled end of the PEPP – in other words, the bar for anything but an on-schedule end of the PEPP is high.
  • Prefers to speak of ‘transitioning to the normal, non-pandemic programme’ rather than simply of ‘tapering or phasing out’ the PEPP – probably a reflection of his and some others’ desire or expectation for the APP to assume some of the PEPP’s burden and smooth out the unwinding process.
  • Says this transition ‘is something which will be decided in autumn’ – meteorologically speaking, that encompasses the Governing Council meetings on October 28 and December 16, only the latter of which will involve new staff macroeconomic forecasts. However, there is a good chance he is thinking of the September 9 meeting, which will also include updated projections.
  • Observes that highly unequal vaccination rates across regions creates pandemic-related uncertainty that must be considered in ECB decision-making – the pandemic will be a source of uncertainty for some time, and Holzmann doesn’t kid himself that progress in vaccination in OECD countries will let these quickly turn the page, though we imagine that for him this is limited to the realm of risks, i.e. not per se a reason to prolong accommodation in Europe.
  • Reminded that the PEPP was created to address weak demand in the aftermath of the outbreak of the pandemic, but that ‘demand is increasing now and inflation is moving up’ – consistent with Holzmann’s very hawkish score on the Econostream ranking.
  • Says the people of Austria and the rest of Europe are ‘very concerned that inflation is going up and is going to stay’, he said – this is the super-hawk speaking now.
  • Calls inflation ‘the big unknown’ and predicts that ‘higher prices will at one moment lead to higher wages, at least in some parts’ – not a concern widely shared on the Governing Council at the moment.
  • Says that a more clearly symmetrical price stability objective would make the ECB ‘able to tolerate for some time levels higher than we had in the past, and well above 2%’, even above 3% - a hypothetical question for the foreseeable future, but a high tolerance by Holzmann for inflation above 3% seems a poor bet.
  • Seems to agree the ECB might take advantage of less active financial markets in the summer to slow down the pace of asset purchases, but wants this seen as ‘not tweaking, it’s adjustment’ – see last Thursday’s ECB Insight on Econostream.