ECB’s Holzmann: Better Forward Guidance Wouldn’t Bind Us Too Far Into the Future

27 July 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Robert Holzmann on Tuesday said that the ECB’s new forward guidance would be better if it did not tie monetary policymakers’ hands so far into the future.

In an interview with CNBC, Holzmann, who heads the Austrian National Bank, said that like Bundesbank President Jens Weidmann and National Bank of Belgium Governor Pierre Wunsch, he too had had ‘reservations with the proposal, which has to do with the same reasons they raised.’

‘It was a step too far … and we would have wished a different guidance, which doesn’t bind us too long in the future, in order to stay agile and ready in case inflation requires an earlier liftoff’, he said.

With inflation currently elevated and ‘a number of expected changes in front of us’ that could yield yet faster inflation, ‘it’s a tail risk that we cannot exclude, that inflation goes well beyond and may stay there’, he said. Current information suggests inflation will subside again, ‘but we cannot discount’ that it won’t.

Holzmann indicated that an important objection on his part had to do with the new guidance’s failure to completely reflect the ‘very good strategy in which we established 2% in a symmetric manner and included also other elements for discussion’, but instead took an approach implying ‘that the rates would not go down before 2025 at the earliest’.

‘[T]hat’s a too-strong commitment’, he said. ‘And the second part was also that if one looks into the underlying inflation, which is part of the formulation, I think I would have liked a bit more specificity to what this applies, because underlying inflation can be any kind of core inflation which one wants … and what we have seen more recently is a major increase in property prices in many of the European countries, and this is another element which was not happening.’

Finally, he said, he agreed with Wunsch that ‘one should have thought perhaps upon an escape clause … that would have allowed us to break the link earlier.’

Although the ECB’s price stability mandate has primacy over any forward guidance, ‘I think it would have been more honest to the markets to tell [them], “Yes, we want to stay accommodative as it is for the time being, but we stand ready to change the rate if it’s necessary”’, he said.

Holzmann explained the ECB’s unwillingness at the last monetary policy meeting to do more than change forward guidance with respect to interest rates by noting that there was ‘simply too much uncertainty in the middle of the summer’.

‘For September, we have foreseen a discussion of all the elements … besides the rates, which is TLTRO, which is the PEPP, which is also APP, the asset purchasing programme which was always there, in order to find out whether we keep it as it is or we change it’, he said. ‘Both are possible, depending on the inflation developments, depending on the output gap developments, and depending also on the other elements which are taken into account in our decision.’

Asked if the PEPP would be extended, Holzmann reminded that the PEPP was linked to the emergency phase of the pandemic.

‘And as a result, if and as the pandemic is over early next year and we can go back to the normal purchasing program, PEPP will end’, he said. Were for some reason, most likely the health situation, a need to be seen to extend the PEPP, then everybody ‘will agree to an extension if the circumstances are there’, he added. ‘But for the time being, we don’t know this.’