ECB Insight: Holzmann Unlikely to Have Been Urging a Fundamental Deceleration

25 February 2022

By David Barwick – FRANKFURT (Econostream) – That geopolitical turmoil without precedent in Europe in the last 75 years should lead the European Central Bank to tread with heightened caution is entirely understandable, and it would be more than odd if it didn’t. We think this truism is essentially what Governing Council member Robert Holzmann had in mind on Thursday.

Against the backdrop of Russian dictator Vladimir Putin’s war crimes against Ukraine, Holzmann, who heads the Austrian National Bank, told news agency Bloomberg, ‘It’s clear that we’re moving toward normalising monetary policy. It’s possible however that the speed may now be somewhat delayed.’

What Holzmann was saying probably amounted to no more or less than this: ‘the direction of the navigation is clear. But … we will retain our full optionality about its pace: its calendar will remain gradual, state-dependent and open in moving from one stage to the other.’

Those particular words were uttered by Banque de France Governor François Villeroy de Galhau, but many of his colleagues have used very similar language. Villeroy was speaking nine days before Holzmann and Russia’s attack, when it was nonetheless already well known not only that geopolitical tensions were a problem, but that they were likely to become a bigger problem soon. And now they have, not to many observers’ surprise and probably not to Holzmann’s.

To be sure, ‘[u]ncertainty undoubtedly increased due to developments in Ukraine’, as Holzmann now noted. These developments however by no stretch of the imagination came out of the blue. And while as he also said, the ECB ‘will analyse carefully how strongly the economy will be affected’, that is an ongoing exercise.

We see no ‘U-turn’ in Holzmann’s comments and think that if the inflation data continue to support normalisation, so will he. Along with all other developments and risks, the ECB will assess the impact of the various ripples caused by the spasm of violence of the Russian dictator, and issue updated forecasts that do their best to incorporate these and create a sound basis for decisions.

Based on a very recent conversation with one of Holzmann’s colleagues, we fully agree that the speed of travel towards a more normal monetary policy may now come down a notch in the euro area. In the US, the reaction appears to be more muted, logically enough given an anticipated smaller impact there.

But we also think a slower pace of normalisation in the Eurozone is not just because of an actual or expected impact, but rather because, as Holzmann’s peer suggested to Econostream, those Council members in favour of prolonging the journey indefinitely will make Putin an argument for their case.

Indeed, as we observed early yesterday, Bank of Greece Governor Yannis Stournaras managed to do just that even before the first shot was fired.

Holzmann is no Stournaras, and we don’t think he intended to be interpreted as one. Which is why we think the Austrian governor’s comments shouldn’t be made too much of, independent of the separate question of whether or not financial markets had it right to begin with in expecting the amount of tightening this year that they foresaw.

In the end, we stick with what we said here yesterday morning: ‘The fact that there is now war on European soil thanks to the delusions of one Russian madman may well be a reason for the ECB to turn particularly cautious for a moment, but is not necessarily grounds for the trend towards monetary normalisation to cease, and most policymakers are unlikely to see it as such.'