Transcript of Interview With ECB Governing Council Member Holzmann on 15 May 2023

16 May 2023

By David Barwick – VIENNA (Econostream) – Following is the full transcript of the interview conducted by Econostream on 15 May 2023 with Robert Holzmann, Governor of the Austrian National Bank and member of the Governing Council of the European Central Bank:

Q: Governor, an increasing number of your colleagues have indicated that they don’t think the ECB will be done hiking in July, as there will still be a need to tighten policy in September. How do you see this?

A: I’m on record that we are not done yet. This is a statement that still makes sense to me. The question is, at what speed do we go? I would have preferred a speedier increase at the last meeting, so staying at 50bp rather than slowing to 25bp, because it would have shown our determination. Also, comparing the situations in the US and Europe, we now have the same core inflation rate, more or less. One can take into account the fact that the US has an r* that is probably 100bp higher, but still, given comparative inflation levels, European interest rates should clearly be higher than they currently are. So, we are not done yet, and for this reason, we have to continue to hike rates.

Q: It is clear what is coming in June, and a good number of market participants would not be surprised by a July hike as well. But some members of the Governing Council have left little doubt that they don’t think this will be enough. Do you join them in this?

A: Well, if I was for 50bp last time, I would be for 50bp next time, too. As long as we’re below 4%, we won’t be at a level of interest rates that allows us to pause and wait to see how things develop. I think we need to go beyond a 4% interest rate in order to draw even with the US – again, taking into account the different levels of r* - and it’s just a matter of whether we should go faster or slower. My assessment would be that faster would be more appropriate, in order to get to our terminal rate without wasting time. Because in such a case, ultimately, it also means that we can come back down sooner. Whereas if we go up slower, it is likely to require that we stay high for longer. And I prefer the former solution.

Q: It seems very much though that rate hikes of more than 25bp will no longer be possible after May.

A: That’s the problem, that’s the problem. That’s exactly the reason why I wanted to have 50bp, because in this case we would have gotten to 4% faster, in just two moves, and perhaps then we would do a little bit more. But unfortunately, the decision was another one, and so we have to move more slowly, which means that to get to 4% we need to take three more steps, and to get above 4% we need four more increases. As things are currently, that’s to get to the level we need to be at to deal with inflation. Perhaps there will be some miracle and we can stop sooner, but I don’t think it’s likely.

Q: But do you think it has to take a miracle? There are indications that we could be on the verge of a meaningful slowdown of inflation. It could all happen unexpectedly quickly, just like the increase did.

A: I don’t see this in the data yet. My focus is always on underlying inflation, which is approximated by core inflation, and core inflation has barely budged. It’s still very high, and although the rate hikes we‘ve already taken are beginning to have a small effect, I don’t think it will come down much more this year. Maybe a little bit. So, given this persistence of inflation, we have to be careful not to miss the train by hiking only after we needed to, which could force us to be much more rigorous and forceful with policy in the future.

Q: Are rates currently in restrictive territory, do you think? Opinions seem to differ.

A: In my opinion, it is necessary to see this in the context of core inflation. And given core inflation of around 6%, we are still expansive.

Q: Were you happy in any case about the decision to stop all APP reinvestments from July?

A: The thing is, I agree with the decision, but the problem is that moving faster with the APP will of course mean that we have to sell outright from our inventory of assets sooner, which can only be done at a loss. And since all our national central banks are characterised by an asset–liability mismatch, this would increase our losses further. So, I don’t think that we can do much more with the APP with regard to the speed of QT. And that means that we will have to turn to the PEPP. But with the PEPP, the problem we have there is that the current set-up provides us with a flexible instrument to deal with market differences. So if and when we start to sell assets acquired under the PEPP, this instrument will still be there, but will become less relevant than previously. And given the increase in interest rates and the many things that will happen, there may be a limit to the speed at which we can move here. It will have to happen, but it won’t be an easy ride.

Q: Presumably the forward guidance on the PEPP will change first. Might that come this year?

A: We will have to say that we’re not going to wait until the end of 2024, we want to be able to act earlier. But I would prefer to have the interest rate decided first, and only afterwards have the change in QT with respect to the PEPP, in order to have an anchor for the interest rate policy before we involve PEPP in our QT.

Q: Do you mean actually getting to the terminal rate before you change the forward guidance on the PEPP?

A: Well, if my wish were to come true, we would be moving towards a terminal rate somewhere above 4%. I don’t know yet where it will be, because it’s too soon to know, but if we reached a rate above 4%, we could more easily decide about the PEPP.

Q: Switching gears a bit, what about the looming question of the ECB’s operating framework? Would you prefer a floor or a corridor system?

A: I’ve been studying the drawbacks and advantages of each system. My inclination would be to go back to a corridor system, because it offers more room for the private market. The floor system requires more liquidity, whereas I would like to see more intermediation of liquidity via private markets.

Q: No matter what, it seems we will be awash in liquidity for a while, so that it could be some time before a corridor system works.

A: True, but a corridor system could also be done with a very small difference between lending and borrowing rates. And so it could be done even now, or at least soon; we don’t have to wait until all the liquidity has all disappeared. If we waited for that we would wait way too long.

Q: Still, we shouldn’t expect a change in the corridor very soon, should we?

A: We haven’t had our discussion yet at the level of the Governing Council, so what I’ve said is the result of prior discussions with colleagues at the Austrian National Bank. The advantage of the floor system is its simplicity. The corridor system requires a bit more work, but the beauty of it is that it offers room for private markets.

Q: On a very different subject, I haven’t heard you or any of your colleagues worrying publicly about what would happen if the US failed to reach a debt agreement on time.

A: It’s also on our mind, but we still believe in some rationality, and I cannot imagine at the end of the day that no compromise will be reached. This sort of thing happened all the time when I was living in the US, so I’ve seen it before and a compromise was always found. We all hope that this will be the case this time, too. Of course, there’s still a tail risk that there won’t be any compromise, but it would be a disaster, not only for the US, but for the rest of the world too.