ECB Insight: Holzmann Insights Interesting But Hardly a Game-Changer

23 February 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Robert Holzmann supports tightening monetary policy, and essentially made this clear again on Wednesday for anyone who has been under a rock lately; the details are naturally interesting but the overall picture hardly changes as a result.

Holzmann, who heads the Austrian National Bank, said in an interview with Swiss daily NZZ that ‘[t]he inflation rate is indeed high. Moreover, the latest data do not indicate that this has changed in recent weeks.’

Interesting about this is that it is the clearest or in any case least guarded suggestion to date about how February inflation, whose outcome won’t be known for some days yet, may look, namely too high. A continued failure of Eurozone HICP to subside significantly has the potential to be the feather on the scale that tips the Council in the direction of tightening.

That said, Holzmann was not terribly specific, and we would not expect him to be quick to point out a weakening of inflation. On balance, we would not make too much of this yet.

When the Council meets in two weeks, ‘[t]he discussion will certainly include a faster phasing out of all bond purchases and the question of interest rate hikes before the end of the year’, he said further. ‘My French colleague [François] Villeroy de Galhau has already mentioned an end to bond purchases in the third quarter.’

That deliberations will encompass the thorny issue of lift-off is not surprising, but having been so explicit about this, Holzmann ensures that Lagarde will be queried yet more vigorously than she would have been otherwise. We suspect that she may nonetheless not yet be ready to go much beyond again failing to rule out the possibility of an initial rate hike this year.

Holzmann made clear his own preference. ‘[I]t would also be possible to set a first interest rate step in the summer before the end of the purchases and a second at the end of the year’, he said. ‘I would favour this variant.’

Here it must be noted that this preference has been no secret. On January 24, for example, he said: ‘There is a lot to be said for saying, especially if inflation is high again in March and especially in June, that’s it, we will stop [asset purchases] in three months' time and then initiate interest rate steps.’

In the NZZ interview, Holzmann was actually somewhat cautious in this particular respect, as he subsequently added that he ‘would like two interest rate steps by the end of this year or early next year’, thus suggesting that one lonely hike in 2022 would appease him.

‘Some of my colleagues would perhaps be even more progressive here, while others would be more cautious’, he said. Who might he be referring to here, in the plural, no less? It is natural for Dutch National Bank Governor Klaas Knot to spring to mind, but Knot on February 6 was anticipating a second rate hike only ‘sometime in the spring of '23, say.’

Has that changed in the last two weeks? There is also Bundesbank President Joachim Nagel, but he has been less committal than Knot. ‘The first step is to end net bond purchases in the course of 2022’, Nagel said on February 9. ‘Then interest rates could rise this year.’

Probably Holzmann’s boldest initiative of the interview was his proposal that ‘1.5% would be, very roughly speaking, the benchmark towards which the key interest rates must move’, as he stated. ‘Only when this value is reached would our interest rate policy no longer be expansionary, but neutral. We should communicate this clearly to the market participants.’

That this level would be reached in 2024 ‘could be realistic’, he said. Lagarde, if questioned about such prospects on March 10, may smile tiredly as she dismisses the query, as she is unlikely for now to share Holzmann’s desire to ‘communicate this clearly to the market participants’, especially as she is probably not thinking so far ahead anyway.

Indeed, we wonder who else is, if anyone. Knot, though as noted the other Council member clearest in calling for rate hikes, said on February 6 that he expected ‘the first two steps to be taken fairly quickly, because they are the steps that will get us out of negative interest rates, so they will follow each other reasonably quickly.’

Thereafter, however, things could go slow, Knot indicated, saying that ‘if we do not get a wage-price spiral, and if inflation expectations indeed remain well anchored around our 2% target, then there is not so much reason for us to raise interest rates quickly and sharply.’

It is not apparent at this stage that anyone shares Holzmann’s prodigious appetite for rate hikes, though this will naturally depend on developments.