Exclusive: ECB’s Holzmann: Danger of Undershooting 2% Is Not a Reason to Cut

17 February 2025

By David Barwick – VIENNA (Econostream) – There is a real chance that euro area inflation will fall below the European Central Bank’s price stability target of 2%, but this would justify less monetary policy easing, not more, according to Council member Robert Holzmann on Monday.

In an interview with Econostream, Holzmann, who heads the Austrian National Bank, said, ‘I definitely see the danger of getting into a situation of inflation under 2%, but for me this is not an argument to cut.’

‘On the contrary, it is a reason to cut less, because if you automatically cut further when you see such a trend, then the expectation of lower inflation might become self-fulfilling’, he explained.

Even aside from the danger of such undershooting, Holzmann expressed a sceptical view of the value of further monetary easing. Core inflation was the proper gauge of price pressures in the region, he argued, and its current level of 2.7% implied that the ECB was ‘already moving into neutral or slightly expansionary territory.’

Below a key interest rate level of 2.5%, to which the Governing Council might decide to cut at its 6 March policy meeting, ‘there would be even less question that we are no longer restrictive, and given all the uncertainty, I would be very cautious’, he said.

He would go into that meeting ‘with an open mind, as always’, he said, emphasising that the outcome was not a foregone conclusion.

‘There is some probability that we’ll cut; there is some probability that we won’t’, he said. ‘But definitely, a decision in favour of another cut gets harder and harder, both now and beyond March.’

‘We need to reflect ever more deeply before we enter the next phase’, he added.

Recent developments were not wholly inconsistent with what the Governing Council had expected in December, when it last issued macroeconomic projections, but the progress on the inflation front was being achieved ‘not as quickly as we assumed’, he said.

‘We saw quite a substantial deviation in January, and we have to expect that such negative surprises can be repeated’, he said.

With regard to the decline of services inflation to which the ECB had pinned its hopes for further disinflation, Holzmann objected that he would normally agree that this measure would subside ‘under normal circumstances’, but to date had persisted stubbornly at some 4%.

‘And it may come down, but how fast?’, he asked rhetorically. ‘We can’t count on it too much.’

The euro was still well inside of its historical range and its weakness was unlikely to exert much influence, he said.

‘[B]ut what may make a difference soon is if and when tariffs come, and if and when financial markets reassess the situation in Europe and the US’, he said.

In particular, if the impact of the trade conflict is consistent with models, then inflation will mount and growth will be further reduced, he said.

‘So, monetary policy has to be extremely careful’, he said.