ECB’s Holzmann Urges Only Short-Term Commitment Next Week; Open to Policy Sequence Inversion
7 December 2021
By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Robert Holzmann on Tuesday said the growth outlook was largely intact, but he warned anew of inflation and suggested that he would support inverting the standard sequence of policy withdrawal.
In an interview with German business daily Handelsblatt, Holzmann, who heads the Austrian National Bank, said that he didn’t expect ‘major adjustments’ to the growth outlook on account of the Omicron variant of the coronavirus.
‘In many countries, the third quarter went better than expected’, he said. Omicron meant additional uncertainty, he said, ‘[b]ut I remain optimistic that we will only see a dent in the economic recovery and not a broad slowdown.’
In contrast, the inflation outlook would probably change, he indicated. ‘I think it is very unlikely that we will reach a value below 2% in 2022 as a whole’, he said. ‘However, inflation is likely to peak at the turn of the year, because some base effects from very low values in the previous year will then expire. In addition, it is foreseeable that energy prices will no longer rise as strongly as before. On the other hand, supply bottlenecks will continue to play a major role, for example in the food sector.’
As for second-round effects, ‘wage settlements do not tell the whole truth’, he said. ‘In some countries, parts of the labour market are extremely tight, partly because not enough workers are coming back after the pandemic. This applies to the service sector, but also to health and IT.’
Problematic is that such effects haven’t been seen for decades, he said, as a result of which ‘our economic models are not set up for it. At the moment we don't know how fast inflation will fall. We won't know how much inflation will fall until March or June of next year.’
For that reason, monetary authorities ‘should not commit ourselves for too long and react to the data as they come’, he said.
Monetary policy could in principle return to normal ‘very soon’, he said. ‘But that does not mean that we will then abandon unconventional measures, i.e. return to the time before 2008’, given that the equilibrium interest rate is still not positive, rendering standard monetary policy ineffective, he said.
Holzmann noted that purchases under the ECB’s pandemic emergency purchase programme (PEPP) had not strayed much from the capital key. As for retaining the possibility of departing from the key, he did not close the door, ‘[d]epending on how the situation looks in the spring’.
‘It would be possible, for example, to keep PEPP in the cupboard, so to speak, reserving the right to reactivate it’, he said. ‘The other option would be to keep the flexibility for replacement purchases under PEPP.’
‘When the net purchases under PEPP are stopped in the spring, the current plan is to keep the bond holdings constant until the end of 2023 and only then to reduce them’, he elaborated. ‘Therefore, for a long time to come, maturing papers under PEPP will have to be replaced by new purchases, and there could still be flexibility there. However, we would have to check whether this is technically and legally possible.’
Just being able to deploy flexibility might make it unnecessary to use it, avoiding monetary financing, he suggested.
As for making the asset purchase programme (APP) more flexible, Holzmann said he ‘would take a critical view of that. APP was already created before the pandemic under completely different conditions. Moreover, the APP has been very closely scrutinised and blessed by the European Court of Justice (ECJ). Allowing new deviations from the existing rules could lead to a new review.’
Holzmann downplayed fears of cliff effects related to asset purchases. ‘If you look at the numbers, the new purchases in the APP are relatively small in relation to the purchases that take place to replace maturing bonds from the portfolio. So I don't see such a cliff effect.’
His call to reduce the APP to zero as soon as September 2022 was made before Omicron emerged, he said. ‘Today I would say we have to wait and see with the final decision. But apart from that, I have always been against linking the bond-buying programme and the interest rate hike too closely. I have long been in favour of separating the two more.’
A rate hike could thus come ‘while net purchases are still underway’, he said. ‘If I'm not mistaken, the Swedes did something like that at the beginning of 2020 and, contrary to what some fear, it did not disturb the capital markets.’
That the ECB’s current forward guidance does not envision this is a reflection of ‘the time when deflation rather than inflation was imminent’, he said. ‘They did not want to spend too much money on bond purchases and therefore promised low interest rates for a long time. With higher inflation, things look different. In certain situations, it could make sense to raise interest rates, but to continue to provide liquidity to the markets through bond purchases.’