ECB’s Holzmann: Under Extreme Circumstances, Could Hike Rates in 2022
22 December 2021
By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Robert Holzmann on Wednesday said that the ECB could hike interest rates already in 2022 under extreme circumstances.
At a press conference of the Austrian National Bank, which he heads, Holzmann said, ‘If we see that ... in the inflation rates that have been realised, the decline is not as ... expected ... then in a sense the alarm bells are ringing, and what could be done then?’
‘We in the Council can always reduce or halt the purchases that are still outstanding in the APP’, he continued. ‘And if that happens, it will be a price signal to the markets, because we have decided that interest rates will only be raised after the purchases have been suspended or stopped.’
‘That means that in an extreme case it would be possible that this year  … data-driven, purchases would be suspended … and even, if one wants, at the end of the year or beginning of next year, the interest rate hike would take place, roughly at the same time as the third interest rate hike in the US. We are always a bit later.’
Holzmann was asked whether to expect an end of asset purchases end-2022 and an initial rate hike in early 2023. The ECB’s forward guidance in general dictates that this will be the order of policy withdrawal, he noted.
‘As always, forward guidance is supposed to guide the financial markets, but it is not something that is an ironclad law’, he continued. ‘But normally if we say we don't need any more purchases now because our inflation target in ‘23 and ‘24 is already at or above 2%, then that would certainly be a strong signal that also the interest rate will rise in the ... following two quarters.’
Were inflation to increase very strongly in the wake of second-round effects, then ‘one could well imagine raising interest rates beforehand and not waiting until the purchases are phased out, so as not to upset the markets’, he suggested. ‘That got some, but not a lot of support in the Council ... but ... things are flexible and so I think in an extreme case there could be the flexibility as the case may be, but it's not very likely.’
As to whether staff HICP forecasts of 1.8% in 2023 and 2024 essentially amounted to hitting the ECB’s target, Holzmann said, ‘1.8% is not particularly distinguishable from 2% over a distance of one or two years, which leads to a different assessment of whether it has been achieved or not.’
The ECB wanted to indicate that price stability hadn’t quite been reached, but ‘[t]here were indeed a number of people who said, yes, I think we have already reached 2%, or the difference is not so big that it should not be articulated like that’, he said. ‘It has some influence on the policy, but not a significant one, and yes, there were differences, and I don't give any information about my voting behaviour at the meeting.’
The inflation dynamic had been surprising, but less because of increases per se than because of their nature and in particular the unusual behaviour of gas prices, not yet fully understood, he said. Similarly, ‘the supply chain disruption was more severe and longer lasting, and again, the economic as well as technical explanation is surprisingly not so clear’, he said.
The lagged pass-through to consumers means that higher gas prices will still be around early next year, but there is ‘no significant reason at the moment’ for supply constraints to persist indefinitely, he said.
‘What is certainly the case, however, where there are differences in assessment, is the question of the upside risk, where some of the Council colleagues also believe that the upside risk is higher than is perhaps assumed and that we should therefore be very attentive, very vigilant, and perhaps ready to act if this development occurs’, he said.
The single greatest source of uncertainty, according to Holzmann, ‘is probably something that is not really built into this forecast, if you will, it’s the security policy and global economic discussion, because if that happens, there could be a very, very large reduction in the economic area.’
With respect to inflation, he continued, ‘what we can't really estimate yet, despite all the close scrutiny of the data ... is the question of second- and third-round effects. ... So far the wage development is such that we have no surprises … but it would be possible.’
‘And the second aspect is on the pricing side of the companies’, he added. ‘Currently it doesn't look like companies are taking extreme advantage of that, but that could still happen. That could trigger second- and third-round effects ... and that would then cause higher inflation values.’