ECB Insight: Holzmann: Severe Scenario May Be Baseline Now; Could See HICP of 10% or Higher

1 April 2022

By David Barwick – BOLOGNA, Italy (Econostream) – The official baseline macroeconomic scenario of the European Central Bank is no longer valid and indeed the current outlook is more akin to the severe alternative scenario issued with the updated staff projections last month, Governing Council member Robert Holzmann said late Thursday.

Speaking at a panel event, Holzmann, who heads the Austrian National Bank, said that ‘by now, they [the alternative scenarios] may be considered … not as the severe, this may be … the baseline what we have now.’

‘We may come to a situation in which there may be inflation rates up to 9, 10, more percent, and output down to, we will move towards zero or negative’, he said.

Econostream reported earlier – not on the basis of these or any other comments from Holzmann - that the latest baseline scenario of the ECB was never really valid, and that policymakers increasingly see the euro area economy as being in one of the less optimistic scenarios the ECB presented at the March monetary policy meeting.

The continuation of the Russian war of aggression against Ukraine ‘is a major, major drag on European economies, which of course makes the question for a solution even stronger’, Holzmann said.

Holzmann suggested that China could have ‘a major part’ in bringing about a resolution. If China could be induced to contribute to resolving the conflict, ‘we would have a very beneficial outcome for Europe and the rest’, he said.

‘If the Chinese were to decide against that, we may end up with something which is a bipolar world, and which would affect the monetary system over the next decades to come’, Holzmann continued. ‘And this is something which would have major consequences … also for Europe, for the European currency and European integration. So, there’s still hope, but the solution possibilities…are not increasing, but shrinking by the day.’

Holzmann asked rhetorically in the context of increased sovereign indebtedness in Europe whether monetary policy can operate as needed.

‘Because some countries are afraid with more debts than the average that they won’t be able to bear the costs increase in the … interest rate’, he said.

‘And then something which is still a threat above us which influences the discussions about monetary policy has to do that at the moment, inflation expectations still seem to be broadly anchored at the level of 2% of the inflation rate we have put forward as an objective of the ECB monetary policy’, he continued. ‘But there are first signals there on the market measured that … the inflation expectations may [be] moving upwards. And this of course … pushes us to act more quickly than otherwise. So that’s an area where … the shadows of the past are hanging a bit.’

Holzmann expressed doubt in response to a question that targeting core inflation rather than headline HICP would be a good idea, as the core reading, he argued, could be 1.7% for example and headline 8%.