Exclusive: ECB’s Holzmann: See Disinflation Underway, With Little Reason to Fear a Hiccough in the Process

28 May 2024

By David Barwick – VIENNA (Econostream) – European Central Bank Governing Council member Robert Holzmann on Monday said he would support a 25bp rate cut by the ECB next week in view of the likelihood of disinflation to continue in an environment of economic weakness.

‘I don’t have information that makes me feel completely confident, but what I see at the moment is that the disinflation process is indeed underway and that the different price indices are showing decreases’, Holzmann, who heads the Austrian National Bank, told Econostream on the margins of an event (transcript here). ‘And I don’t see much reason to fear a hiccough there.’

He would therefore support the rate cut the ECB has clearly flagged for its 6 June monetary policy meeting, he said. However, he emphasised, ‘I will also warn that there should be no automaticity about further moves, meaning that future reductions in interest rate cuts should not happen automatically.’

The economic weakness of the euro area, in particular compared to the vibrancy of the US, was limiting price pressures and had led him to be more open to the start of monetary policy easing by the ECB, he said.

‘This is why I am ready to support one cut, but each and every step that follows will need its own separate justification’, he said. ‘In September and in December we will have new information and we will have to make a new decision.’

The latest European wage growth data had been on the high side and were thus a ‘wake-up call’, but did not necessarily imply the materialisation of an inflation risk, because firms might not be able to pass through their higher costs in the context of economic weakness, he said.

That said, the latest wage figures ‘will definitely lead us to be cautious in making any predictions about what could happen in September’, he said. ‘We need to see the developments.’

Should developments be in line with what markets envision, ‘then of course we can continue’, he said. However, he reiterated his concern that ‘if we increase our gap with the US to a certain extent then I fear that the exchange rate will come into play and hit us in terms of inflation.’

One rate cut by the ECB was not a problem, but if the ECB were to cut thrice while the US Federal Reserve stood pat, then the exchange rate could increase sharply, he warned.

As for how many moves could be reasonably expected by the ECB between now and the end of 2024, based on current information, ‘I would say two cuts, at maximum three’, he estimated. ‘But this is if everything goes according to our optimistic assumptions. If things change, then of course this would also change.’