ECB’s Holzmann: HICP of 1.9% in 2024 ‘Not Inconceivable, But Not Very Probable’

22 March 2022

By David Barwick – FRANKFURT (Econostream) – Euro area HICP in 2024 of 1.9%, as currently projected by the European Central Bank, is not out of the question, but is also not too likely, ECB Governing Council member Robert Holzmann suggested on Tuesday.

In a podcast published on the website of the Austrian National Bank, which he heads, Holzmann said that ‘[t]his 1.9% is part of a mechanism for the decisions of the ECB. If certain conditions are met, then we can act. … For me that is the most optimistic scenario that one can imagine. It is not inconceivable, but not very probable. Personally, I believe that inflation in the coming years will be higher. It will go back down, but it will be higher than this 1.9%.’

Asked whether a second oil price shock was imminent, he said he did not expect this because experience shows that oil prices alternate between going up and going down. An inflation rate of 10% as a consequence of the various factors now causing upside price pressures was in ‘no way’ to be expected, he said.

‘Even if it were so that we would have that for a few months, it is so that everything would be undertaken to reduce this inflation as quickly as possible’, he added.

As to whether he agreed with the ECB’s clearly defined sequencing of policy withdrawal in which net asset purchases are to cease before the first rate hike, Holzmann made clear again his divergent view.

‘To put it briefly, no. In my view, the ECB could certainly turn around the sequencing, that is the order’, he said. ‘Other central banks do that. … But at the Council meeting on March 9 and 10 of this year, the ECB decided to adhere to this sequence. I’m a member of the Council. It was a unanimous decision that I agreed with so as to have at least some movement in a direction.’

It will be necessary to draw appropriate lessons from whatever effects are observed in the UK to result from a rate hike amid ongoing asset purchases, he said, suggesting that these would be slight.

‘The reason why I’m for bringing forward the interest rates versus purchases is that the interest rates are perceived by the general public’, he said. ‘Interest rates rise – everyone knows. If the purchases are reduced or stopped, the understanding of what that means is comparatively limited among the general public, even in banking circles, and therefore does not have the same symbolism. And important is that interest rate hikes mean to people, “Aha! My central bank, the ECB, is taking inflation seriously and doing something.” For me that was the main reason.’

‘… this new shock [of war] will have an impact again also via demand and supply effects. Inflation will be higher than we had thought. Growth will be lower. And probably for some time. And we will also need corresponding instruments again to fight both: inflation and the simultaneous risk of a weakening of the economy. That means a very, very big challenge for central banks in Europe and worldwide.’

The outbreak of war with the Russian attack on Ukraine would lead to higher inflation and lower growth, ‘probably for some time’, he said. ‘And we will also need corresponding instruments again to fight both: inflation and the simultaneous risk of a weakening of the economy. That means a very, very big challenge for central banks in Europe and worldwide.’

Still, while stagflation was a risk, it was not looming, given that stagflation goes hand in hand with joblessness, whereas currently, ‘labour markets are very, very tight’, he said. ‘That means that current developments do not lead to stagflation.’

Holzmann reminded that the ECB did not pursue a particular exchange rate, but did closely monitor related developments, given the significance of these for inflation.