ECB’s Holzmann: Monetary Policy Must Act With Steady Hand and Communicate Clearly

19 June 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Robert Holzmann on Saturday said that monetary policy must act with a steady hand and communicate clearly.

In an interview with Austrian daily Kurier, Holzmann, who heads the Austrian National Bank, said that he expected no short-term changes in interest rates, but that in the longer term this wasn’t necessarily the case.

A tightening of monetary policy by the ECB wouldn’t be as if ‘we pull the plug out and poof, the liquidity is gone’, Holzmann said. ‘There has to be a credible longer-term situation where it is necessary to put less liquidity into the market and take initial action. Monetary policy must act with a steady hand and clear announcements.’

Projections calling for annual inflation to weaken over the next two years give ‘no reason to raise interest rates’, he said. ‘In the short term I don't think there will be any movement in interest rates - in the longer term it could be different.’

Current HICP readings are ‘short-term inflation spikes’, and the excess of supply versus demand on labour markets suggests a return to below 2% inflation in the medium term, he said.

There are however ‘considerations as to why there could be inflationary dynamics regardless of the labour market situation at the time’, he said. ‘It may be that prices will increase into a stream of inflation, but it may just as well be that it will only be a small trickle.’

Monetary authorities are observing attentively and have the tools to react, he said. ‘Should excessive inflation now be seen, this policy - the purchase of securities - would be reversed’, he said. ‘Monetary policy decisions can unfold their effectiveness very quickly.’

Holzmann disputed the implication that the ECB would shy away from hiking interest rates out of consideration for heavily indebted euro area member countries, arguing that high growth this year and next ‘creates the leeway for the highly indebted countries to finance the interest and reduce the debt.’

In any case, he added, ‘it's not about interest rates jumping to 10% anyway, but about a slow increase in government bond rates over the next few years.’

A wave of bankruptcies would probably not occur, he said, even if insolvencies rose back to more normal levels.

Holzmann described the Governing Council’s retreat over the last weekend as an opportunity to ‘discuss a wide variety of current topics’ related to the ECB’s strategy review. ‘We started rethinking the ECB's strategy a year and a half ago, and now we're fine-tuning it.’