MNI INTERVIEW: ECB Aware Of QT Risks- Holzmann

The European Central Bank is conscious of the dangers of moving too fast in cutting reinvestments from its asset purchase programme, particularly after seeing last year’s UK gilt market volatility, National Bank of Austria Governor Robert Holzmann told MNI in an interview.

While APP reinvestments have already declined by EUR15 billion per month from March 1, with the future pace of quantitative tightening up for review at the end of June, even those Governing Council hawks most enthusiastic about shrinking the balance sheets recognise the risks in unwinding, Holzmann said. (see: MNI EXCLUSIVE: ECB Should Hike As Market Fears Wane - Kazaks).

“I think we all want to have a smaller balance sheet, but we are all still a bit unsure how much the financial system can support, and at what speed?” he said, “Even the people who continue to be more on the hawkish side take this seriously, because it’s difficult to anticipate what's going to happen. The UK experience is something which is in our minds there.”

SHORT-TERM RATE FRAMEWORK

The future course of APP reinvestments, and that of reinvestments from the pandemic emergency purchase programme or PEPP, currently set to run until at least the end of 2024 - will be decided during debates over the Eurosystem’s operating framework, said Holzmann, a prominent hawk who considers another 50-basis-point rate hike to be possible in May if financial conditions do not worsen.

“The discussion of QT will be part of the discussion around our future price-setting system,” Holzmann said. “The other part has to do with PEPP, which is currently used as a kind of a buffer towards difference in spreads. It’s proved a useful instrument, but you cannot keep this system forever. Or you have to give it a different rationale.”

How the ECB uses its balance sheet to provide sufficient liquidity while steering short-term interest rates is a key topic for policymakers, with Executive Board member - and head of market operations - Isabel Schnabel setting out the pros and cons of a ‘floor’ versus a ‘corridor’ system in a speech.

FLOOR SYSTEM

But a floor system “is only consistent with more liquidity and a larger balance sheet,” while a corridor system offers a more market-driven result but is more difficult to operate due to greater interest rate variability, Holzmann said.

Holzmann admitted to being “very concerned” at the prospect of a crisis in the commercial real-estate sector comparable to the SVB/Credit Suisse affairs, but he said it was “not [a crisis] that is happening now. Our system of supervising, understanding what has happened in this sector, can be improved - I think this is the message.”

Nor is Austria’s banking sector expected to come under added strain as a result of its exposure to dual currency mortgages in central and eastern Europe, despite their sensitivity to sharp interest rate hikes and exchange rate volatility.

“My understanding is that the reduction of the outstanding loans was quite high. Typically, it’s more a problem of politics when such issues arise. There may also be some outstanding legal issues. But from the banking side, the remaining volumes of FX loans are no cause of concern.”

INFLATION

On inflation, the ECB will find it "tough" to meet its own projection of consumer price growth of 2% by 2025 without further rate rises unless workers and firms show greater restraint in their wage and profit demands, Holzmann said.

Spiking oil prices following yesterday’s decision by the oil-producing nations group OPEC to cut production also indicate that the downward contribution from falling energy costs “won’t be simple," he said.

“We won’t come down to the [price] levels we had before the energy crisis, and this is even without taking into account the effect of increased demand from China and India.”