ECB’s Holzmann: Size of December Rate Hike Data-Dependent; ‘Everything Is Possible’
11 November 2022
By David Barwick – VIENNA (Econostream) – The European Central Bank will continue to hike interest rates in December, but the magnitude of the hike remains completely open for now, Governing Council member Robert Holzmann said on Friday.
Speaking before a club of economic journalists, Holzmann, who heads the Austrian National Bank, noted that ‘inflation in Europe is still climbing’ and that there had not yet been an evolution such as in the US, where inflation most recently weakened.
Still, despite Europe’s greater susceptibility to energy price developments, Holzmann suggested that softer US inflation and sinking producer prices in China could warrant some hope of an improvement here, to which the ECB’s policy normalisation was contributing.
A further increase in borrowing costs was nonetheless necessary, he made clear. ‘To what degree?’, he said of the hike to come in December. ‘That will depend on the data. Therefore, everything is possible’, he said.
That meant that a hike of 0.75bp remained an option, as did 0.5bp, he said. ‘That is all possible’, he said. ‘It will depend on our projections.’
In general, his greatest policy worry currently was ‘to make the wrong decision’, he said. ‘Wrong is that one does too much or too little.’
The environment had changed in terms of incoming information, ‘so that the decision is no longer so easy to make’, he said. However, he added, ‘at the moment we have not yet reached the end of the road’ with respect to interest rates.
Holzmann declined to specify the likely terminal rate of the hiking cycle, observing that this would be tantamount to providing forward guidance under conditions of high uncertainty and thus subject to error. That could ‘lead to large distortions’ on financial markets, he said.
The ECB wants to reduce its balance sheet, he said. ‘We are careful because the financial markets are to a greater extent uncertain than maybe a half a year or a year ago’, he said. The ECB does not wish to ‘overwhelm’ the markets.
There are moreover many, many technical questions, economic questions’ related to the reduction of the balance sheet, he said. ‘We will be careful about reducing it.’
With respect to financial markets, Holzmann at another point commented that these ‘have become much more instable at the moment … that doesn’t mean that we have a big danger of instability.’
Holzmann expressed a willingness to see ECB monetary policy become restrictive, noting that ‘to fight inflation … one has to limit demand’.
‘Here at the moment we also have the problem, that fiscal policy, due to the social distortions of inflation’, remains expansive, he said. ‘We are trying to step a little on the brakes, but for political reasons, others have to step on the gas.’