ECB’s Holzmann: Interest Rate Probably Now Around Neutral, But Must Hike Significantly Further

11 January 2023

By David Barwick – VIENNA (Econostream) – European Central Bank monetary policy was likely around neutral levels, but would have to tighten significantly further into restrictive territory, according to Governing Council member Robert Holzmann on Wednesday.

At the Euromoney Central and Eastern European Forum, Holzmann, who heads the Austrian National Bank, said with respect to the rate hikes implemented by the ECB to date that ‘[h]opefully with this we are coming now to the neutral rate’, but that rates would nonetheless have to rise ‘significantly further’ so as to become sufficiently restrictive to restore price stability.

‘We are probably around neutral territory’, he said subsequently. He declined to speculate under currently elevated uncertainty as to the terminal rate, saying that ‘we don’t know yet’ where it lies.

There were no signs that market expectations of inflation had dis-anchored, he said. Following their earlier increase, thanks to monetary policy actions ‘we find out that inflation expectations returned again’, he said. ‘The market believes that we are able to contain inflation and bring it back to 2%. This is actually very good news.’

The ECB would watch the development of core inflation ‘very carefully’, he said. ‘[W]hat we see so far is that the pipeline pressure is still there’, he said, adding that this was something to be worried about.

Even if euro area inflation was seen subsiding, risks remained to the upside, he said.

As before, Holzmann expressed support for being cautious about quantitative tightening, noting in particular the experience of the UK. ‘So we want to start out slowly and watch carefully’, he said.

Notwithstanding ECB President Lagarde’s comment three years ago that the ECB was ‘not here to close spreads’, he said, spreads are ‘very much on our mind’.