ECB Insight: Holzmann’s Lonely Stand, We Suspect, Changes Little to Nothing

7 June 2024

By David Barwick – FRANKFURT (Econostream) – The opposition of Austrian National Bank Governor Robert Holzmann to the European Central Bank’s decision yesterday to cut interest rates by 25bp must have been somewhat of a surprise not just to a large number of his fellow Governing Council members, but to Holzmann himself.

At least, as of 27 May, he sounded rather firm about his intention to support the rate cut that had been so thoroughly flagged. That was the day Econostream asked him whether there was ‘any chance’ he’d oppose the cut.

Though not ‘completely confident’, he responded, ‘the disinflation process is indeed underway and … the different price indices are showing decreases.’  Furthermore, he added, ‘I don’t see much reason to fear a hiccough there’.

‘So, as things stand now, I will support the cut next week’, he continued, but would insist on ‘no automaticity about further moves’.

Holzmann further explained that he had been led to support the cut by ‘the weakness on the output side’. This was ‘why I am ready to support one cut’.

He got what he wanted yesterday about the lack of automaticity regarding further easing. Although key wage data in the run-up to the meeting had not been ideal, these had been released the week before he spoke to Econostream, and didn’t dissuade Holzmann, who argued instead that ‘high wage data don’t automatically mean that there’s a risk to prices.’

Of course, as is usual, Holzmann, prior to publication of the transcript of his chat with Econostream, had been given the opportunity, which he took, to make changes, none of which affected the above in the least.

His reversal yesterday was thus quite unexpected, leading to speculation we also engaged in about the possibility that the opposition came from a dovish member of the Council dissatisfied with the lack of easing progress.

In a statement made initially to the FT and then confirmed by his spokesman, Holzmann said, ‘Data-based decisions should be data-based decisions.’

We take that to mean that the very last data received dictated a no, suggesting that unrevised medium-term inflation projections for both headline and core were outweighed in his estimation by May spot inflation and the upward revisions for this year and next.

As for the implications of his refusal to support the rate cut, if he were the tip of the iceberg and other hawks were on the verge of revolt, then this would naturally suggest a slower pace of easing, all things equal.

However, we would argue that the Austrian governor has thoroughly established that he is in a league of his own, a renegade of sorts. Unless it became apparent that others only reluctantly went along, we would be very hesitant to assume that Holzmann represented the spearhead of something bigger, that he just went one little step further than others.

We also don’t think that the ECB’s shift to such a high degree of data-dependence is indicative of an effort to get Holzmann or anyone else who was at risk of cold feet at the last minute to go along with everyone else.

The data, and the measured confidence Lagarde displayed about how these would evolve, just don’t support that. Most importantly, it was clear before yesterday that data-dependence was going to reign supreme, which is why we on Tuesday we repeated the view, first shared on 15 May, of an insider who felt that there would be a clean slate after the June cut.

In brief, Holzmann’s unexpected opposition does not, at this early stage, seem likely to change anything, principled and genuine though it may be.