ECB Insight: Comments of Council Members Continue to Suggest More Cautious Approach to Normalisation

11 November 2022

By David Barwick – FRANKFURT (Econostream) – Two days ago, we argued here that it seemed pointless to debate whether the European Central Bank’s communication has been setting the stage for what some call a pivot, so obvious has it been.

We think the public comments made in the meanwhile by Governing Council members have been bearing that view out.

Consider in particular Austrian National Bank Governor Robert Holzmann, who today steadfastly declined to share a personal preference for the magnitude of the December rate hike, even as he assured that hike the Governing Council would.

Anything was possible in December, he said, with the outcome dependent on incoming data, including the latest staff macroeconomic projections.

Normally a relatively outspoken member of the Council, Holzmann in the past has had noticeably fewer qualms when it came to conjecturing about the size of future rate steps.

For example, there was this: ‘If you move now from 50 basis points to 75 basis points you could do another 75 basis points and you’d quickly be at the’ neutral rate, he said. ‘Then you could decide if you could stay there or go further.’

That was on August 31, meaning that Holzmann was sharing his view not just as to the September 8 hike, but as to that of October 27, then still two months off.

Why the sudden reticence today? We think his response to another question asked during his appearance at a club of economic journalists, namely what his greatest worry was, provided the answer.

‘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 elaborated.

To put it another way, the ECB is getting closer to the point at which a more measured approach to interest rates will be more appropriate. Some call it fine-tuning.

And then there’s Klaas Knot, head of De Nederlandsche Bank, who in a letter released today warned G20 leaders ahead of their November summit in Bali that the tightening of monetary policy globally posed risks to the stability of the financial system.

‘The record-high debt levels have made markets sensitive to the impact of policy actions on debt servicing costs and debt sustainability’, he wrote. ‘Moreover, financial institutions and market participants have not experienced sharply rising interest rates for a long time … making the adjustment to a world of higher rates challenging.’

Knot, to be sure, was speaking in his capacity of chair of the Financial Stability Board. He may well favour a 75bp hike for December, though his last comment on the subject, made a couple of days after the Council’s decision of October 27, suggested that he was reserving judgment on the matter, given that ‘[w]e still have six more weeks to go and there are still a lot of economic numbers coming out.’

In any event, if Knot is particularly attuned to the mounting financial stability risks of simultaneous and substantial monetary tightening everywhere, then there may be reason to think that his most recent comments would go hand in hand with a certain willingness to approach European monetary policy normalisation more cautiously.

But again, the point isn’t that 50bp is a given for the December hike. It’s not. The point rather is that the ECB is leaving itself plenty of room to manoeuvre in that direction, arguably more than it had in the runup to the last two hikes of 75bp apiece.

And the reason remains, as we said two days ago, that the ECB is beset by uncertainty as to when it will be time for the pivot that must eventually come. December is by no means excluded.