ECB’s Holzmann: Don’t Expect ECB Rate Moves as Large as the Fed’s; Very Worried About China

25 January 2022

By David Barwick – FRANKFURT (Econostream) – When the European Central Bank starts hiking interest rates, it probably won’t do so as boldly as the US Federal Reserve, ECB Governing Council member Robert Holzmann said Monday.

Speaking at an event of a lobby organisation of Bavarian companies allied with Germany's Christian Social Union political party, Holzmann, who heads the Austrian National Bank, said, ‘It is probably the case that in 2022 inflation will not go below 2% ... probably we will be at 3% or more.’

‘So the question, if it goes back in ‘23 and ‘24 in the direction of 2%, what needs to be done in addition to what has been done now?’, he continued. ‘That is, what has to be done now to rein inflation in a little bit, in what interest rate steps do you go up here? And here I think it will be the case that very large interest rate steps will not happen in Europe to the same extent as in the USA, which also has higher inflation rates.’

If euro area inflation remains high in March and June, there are good arguments for declaring that monetary accommodation has to end within a few months and that interest rates then be hiked, he said.

‘And one last point, which is very important then also: how quickly do we then say that we not only no longer buy new debt, but also repay the existing debt?’ he asked. ‘Do we wait a bit, or do we do it immediately?’

Holzmann observed that he had ‘already tried to put a bit of pressure on’ by noting that the policy withdrawal sequencing of the ECB’s forward guidance could be inverted. ‘This was actually rejected by my closer colleagues in the Council, but in the US this is already part of the discussion’, he said.

Reacting with monetary policy too late could ‘be very, very expensive’, he said.

‘At the international level, there are many things we don't know’, he said. ‘China worries me a lot, what's going to happen there in the next period economically, but also pandemically. The Fed is going to change. The Fed is still dominant. That means interest rate changes are going to hit us whether we do anything or not. That's an important point. But also the emerging markets. When the dollar raises interest rates, emerging markets start to sweat. And they've already had the pandemic, they had high debt before, and their health will spill over to us.’

Holzmann said that there was no way to know how much investment the energy transition would require for energy prices to be lower in the relatively distant future than currently.

‘The costs are very real, they have to be borne’, he said. ‘The assumption of zero inflation, energy inflation for '23 and '24 was something I also found out very late, but still ... criticised ... because it gave the impression that we could get below the 2% and then have monetary policy. I think that's something that won't work.’

Holzmann’s Executive Board colleague Isabel Schnabel has also expressed scepticism in this regard, arguing earlier this month that ‘the decline of headline inflation to levels below 2% at the end of the projection horizon hinges on the assumption, derived from futures curves, that in 2023 and 2024 energy is not expected to contribute to headline inflation’, whereas ‘[h]istory suggests that such a profile would be unusual.’

If inflation spent too long above 2%, that could cause a de-anchoring of expectations that would jeopardise ‘the credibility of monetary policy’, Holzmann said. ‘These inflation expectations are very, very important.’

He called into doubt whether high inflation was really a passing phenomenon, noting that ‘[t]he ice age was transitory too.’