Exclusive: ECB’s Holzmann: If Things Stay Unchanged Between Now and Dec 15, I Would Go for 75BP

21 November 2022

Exclusive: ECB’s Holzmann: If Things Stay Unchanged Between Now and Dec 15, I Would Go for 75BP
- Holzmann: ‘If things remain unchanged from now to the decision, then I would go for 75’ bp
- Holzmann: If there were a ‘major reduction’ in HICP this month, ‘I could go along with 50’ bp
- Holzmann: No ‘major recession’ seen for now
- Holzmann: On QT, see ‘‘strong consensus that we should start small to test the markets’
- Holzmann: QT should start with APP, only involve PEPP ‘much later’
- Holzmann: Roll-off of assets acquired under the APP can overlap with rate hikes
- Holzmann: ‘Still very much concerned that a de-anchoring of inflation expectations will take place’
- Holzmann: Recent German wage agreement ‘acceptable’, but may lead companies to increase prices

By David Barwick – VIENNA (Econostream) – The current inflation situation continues to demand a robust policy response from the European Central Bank, making a hike of 75bp in December preferable to a smaller option, Governing Council member Robert Holzmann said Monday.

In an interview with Econostream, Holzmann, who heads the Austrian National Bank, said, ‘We don’t have full information yet, but information recently received lets me say that if things remain unchanged from now to the decision, then I would go for 75’ basis points.

If there were a ‘major reduction’ in inflation this month, he said, ‘I could go along with 50, but for the time being, all the information I have doesn’t show that 50 [bp] should be’ our decision. The signal sent by a hike of just 50bp, following back-to-back 75bp hikes and against the backdrop of still record-high HICP, would be ‘insufficient’, he said.

Moreover, he pointed out, there was still no ‘major recession’ in evidence, but rather a ‘minor growth reduction’. The ECB’s efforts to get inflation under control did not have to be held back by fears of either ‘creating a major recession or making a major recession even worse’, he said.

A 75bp hike would get the ECB ‘within the area of neutral rates’ and thus into position to consider the question ‘how much do we have to do in the future?’, he said, noting that his Dutch colleague, Klaas Knot, had expressed a similar sentiment in a speech on Friday, even if Knot had not speculated explicitly about the magnitude of the Council’s December move.

Picking up on Knot’s analogy to a football game, Holzmann said that the ECB would then be ‘entering the second half, and then it’s a different kind of game,’ also because tightening increments would naturally become smaller.

Holzmann did not see a decision on quantitative tightening in December as capable of picking up any slack created by a too-small rate hike, as QT would not actually start until next year, he said. When QT started, he said, if there were still a ‘need to be strong’ in terms of policy, then ’50 [bp] together with the first QT would be an ideal combination, because the estimates say that QT is equivalent to some 20bp’, he said.

Elaborating further on QT, Holzmann joined the ‘strong consensus that we should start small to test the markets’ before increasing the amounts involved, and supported the idea of starting with the APP and only ‘much later’ turning to the PEPP.

However, he expressed some scepticism about the feasibility of providing very clear forward guidance, observing that ‘for this I think we do not have enough information about how financial markets react’. Certain questions around QT must inevitably remain ‘open, also because it’s new, we have never done it, and so we have to be careful not to overdo it’, he said.

There was no need to defer the start of QT until the markets had completely absorbed TLTRO repayments, he said, as the relevant markets were sufficiently distinct. The roll-off of assets acquired under the APP can overlap with rate hikes, ‘because they touch different elements’, he said.

‘Both instruments impact the yield curve’, he said, ‘but in a different manner.’

Holzmann declined to become more specific about the possible terminal rate. Preferable, he said, was to focus on the ECB’s reaction function, since under current elevated uncertainty, the need to subsequently modify any stated terminal rate would create confusion.

For the ECB to stop hiking would require a ‘major sustained reduction’ in core inflation, or prospects of this development, he said. The headline measure was not an adequate standard, he said. ‘I, as others, am still very much concerned that a de-anchoring of inflation expectations will take place’, he added.

The recent major wage agreement in Germany ‘had a level which is acceptable, but which still may force enterprises to increase their prices as well’, he said.