ECB Insight: Herodotou Faces Facts, Holzmann Tries to Make Waves, and Stournaras Seems Torn

11 July 2022

By David Barwick – FRANKFURT (Econostream) – Of the various members of the European Central Bank’s Governing Council to have spoken out over the last few days, it may be that Central Bank of Cyprus Governor Constantinos Herodotou made the most meaningful contribution to the public discourse about monetary policy normalisation.

To be sure, the soft-spoken Herodotou’s pronouncements were probably overshadowed by Austrian National Bank Governor Robert Holzmann’s advocacy for an outsized rate hike of unclear timing.

‘If the situation does not improve, an interest rate hike of 0.75% might possibly be necessary’, Holzmann told Austrian daily Kronen Zeitung in an interview.

What might possibly be necessary is one thing; quite another is what sort of move would be palatable to the majority of the Governing Council, only a small fraction of whose members have been willing even just to flirt with the idea of a 50-basis-point hike in July.

Alas, the newspaper did not report whether its reporter had asked Holzmann to assess honestly the chances of a 75-basis-point hike down the road, but it seems improbable that he would see a very high likelihood of this occurring.

Holzmann, who on February 24 mused in light of Russia’s invasion of Ukraine that ‘the speed [of policy normalisation] may now be somewhat delayed’, is not averse to attention-getting utterances, but we don’t even consider this one a trial balloon, not least because he promptly also played down the likelihood of a wage-price spiral.

More worthy of note is probably the fact that Herodotou, who belongs to the Council’s dovish faction and is one of the most reticent members, warned in a speech on Friday that ‘[b]roader and intensified inflation pressures that would threaten to de-anchor inflation expectations could require quicker rate moves.’

Observing the surge in euro area HICP last month to a new record high, he argued that this was ‘strengthening the case for further increases as the rising prices continue to erode economic sentiment’.

‘However, acting too little and too late could necessitate acting more aggressively which could impact future growth’, he cautioned.

This could have been said just as easily by super-hawk and Bundesbank President Joachim Nagel. Indeed, on June 23, Nagel did say it: ‘Currently, in my view, central banks must not respond with too little, too late. If monetary policy falls behind the curve, even stronger hikes in interest rates could become necessary to get inflation under control. This would create much higher economic costs.’

Also up over the weekend was Bank of Greece Governor Yannis Stournaras, who in an interview with Bloomberg indicated that the ECB would unveil its new anti-fragmentation tool on July 21, only to promptly undermine his confidence by declining to go into any detail, pleading an ongoing discussion.

Moreover, he expressed the hope ‘that if we convince markets that it is a, like a whatever-it-takes tool, I think there's a very high probability that it will not be needed. It will be on the shelf, but it will not be needed.’

Stournaras thus managed simultaneously both to whet observers’ appetites and arouse further suspicions regarding the ECB’s ability - perhaps even will - to introduce any fully-fledged new instrument up to the task at hand by the time of the next monetary policy meeting.

As for rate hikes, he appeared torn. In formal remarks on Sunday, Stournaras warned of ‘higher inflationary pressures persisting for much longer than previously expected’ and of the possibility that wage pressures ‘could lead to an entrenchment of inflationary pressures and expectations’.

In the interview, on the other hand, the emphasis was on ‘gradualism, flexibility and optionality.’ In contrast to his Austrian counterpart, Stournaras avoided mention of what might come after September in the way of rate hikes except that it depended on data, but he was very ready to suggest that a recession next year would lead monetary authorities to ‘consider our position again.’