ECB’s Holzmann: Expect 50BP Rate Hikes at Next Four Governing Council Meetings

6 March 2023

By David Barwick – FRANKFURT (Econostream) – The European Central Bank will likely need to counter undiminished core inflation with 50bp rate hikes at each of the Governing Council’s next four monetary policy meetings, according to Council member Robert Holzmann on Monday.

In an interview with German financial daily Handelsblatt, Holzmann, who heads the Austrian National Bank, said that the ECB’s current policy stance remained far from being restrictive and urged that the central bank’s balance sheet be reduced at a faster pace.

Noting the recent further rise in euro area core inflation, Holzmann asserted the existence of ‘an almost unanimous view in the Governing Council that if there is no improvement in core inflation, we need to continue on the path of rate hikes.’

Core inflation was unlikely to subside meaningfully before mid-2023, instead staying more or less put, he said. ‘In that case, I expect us to raise interest rates four more times this year by half a percentage point’, he said.

This meant the Council meetings in March, May, June and July, he said. ‘…at this point I would be in favour, given the way the data are’, he said.

Interest rates were ‘still a long way’ from being restrictive, he claimed. ‘Even if we now raise interest rates three times by 0.5 percentage points, we are only at a deposit rate of 4%’, he said. ‘Only then would we get roughly into the restrictive area.’

A restrictive stance was needed because without one, ‘wage demands will become higher and higher, and the development will take on a life of its own’, he warned.

Given the present state of labour markets, he indicated, ‘I expect it to take a very long time for inflation to fall.’

Although a wage-price spiral was not currently in evidence, higher wages were having an impact that might yet lead to lastingly higher prices, he said.

Core inflation would be of particular importance in determining the end of the hiking cycle, he said. ‘If we had an estimate of the core inflation rate of 2% for the end of 2024, that would be a very positive signal’, he said. ‘We also need to pay attention to how core inflation develops quarter-on-quarter. So we can see how persistent inflation is.’

It was too soon to say whether the ECB would be able to cut rates next year, he said. ‘My hope is that we will have reached the peak of interest rates within the next twelve months’, he said. ‘But in the current environment, this is uncertain. Inflation can be more persistent, and we may be forced to go even higher.’

Labour market developments and a potentially faster-than-expected global economic pick-up were factors that could make it ‘even more difficult to avoid new inflationary effects’, he said.

Weaker energy prices ‘only reach consumers with a time delay’, he argued. As utility companies would continue initially to set prices on the basis of previous energy price rises, ‘it will take at least until autumn for things to return to normal’, he said.

If the current cautious approach to quantitative tightening went well, a next step could be ceasing to reinvest any maturing assets purchased under the APP programme, though ‘that's not very much either’, he said.

Therefore, the ECB could consider as of later this year modifying its commitment to reinvest maturing principal payments from securities purchased under the PEPP until at least the end of 2024, he suggested.

‘We have a very large balance sheet total’, he said. ‘And to bring them down to a reasonable level, we probably need to be a little more aggressive.’