MNI INTERVIEW: ECB Looks At "Restrictive" Language - Holzmann
MNI (VIENNA) - The European Central Bank is debating whether to maintain its commitment to “keep policy rates sufficiently restrictive for as long as necessary” to achieve its inflation target in its December policy statement, Austrian National Bank Governor Robert Holzmann told MNI.
“There is currently no unanimity, but there is on balance still a preference for keeping it there, if only because there are still risks from meeting to meeting - some measurable, some perceived - and it makes sense not to tailor the statement to each and every one,” Holzmann told MNI in an interview in Vienna, adding that he sees risks tilted to the upside.
“My sense is that interest rates are still somewhat restrictive. Having said that, given the productivity trajectory, demographic changes, etc. in the longer-term the neutral rate is likely to be hardly above zero in real terms,” he said.
Wage growth remains a concern, said Holzmann, known for his relatively hawkish views on the Governing Council, which is widely expected to cut the deposit rate by 25 basis points to 3% in on Dec 12. (See MNI SOURCES: ECB Heads For 25BP Cut; Risks From Trump, Germany)
“The dynamics we are seeing at the moment are not to the downside. If we would see an average of 3%, that would be okay, but even then we have to ask about one-off or lump-sum payments, which can be quite complex. It may be, looking ahead, that we are closer to a level that would be consistent with 2% inflation, but that remains to be seen.”
SERVICE PRICES
Services are still growing at a high rate, in large part due to labour costs, feeding core inflation, he said.
“At the moment I don’t see a risk of inflation seriously undershooting the 2% [target], or at least it won’t do so in a sustained fashion. I don’t exclude it, of course, but at the moment I see a similar level of equilibrium as we saw pre-Covid. If that’s 1.8%, fine, we do have a symmetric inflation target,” he said. “I would not want to press the button on rate cuts solely for fear of a small undershoot.”
The ECB should remain committed to deciding policy on a meeting-by-meeting basis, according to Holzmann.
“I’m not sure there is a better alternative to the meeting-by-meeting approach, and since it incorporates both incoming data from a range of sources and projections, in fact I very much hope this approach will stay,” he said. “Nor would I agree that this approach has made us data-point, rather than data-dependent.”
TRUMP FACTOR
Holzmann was cautious as to the impact on the eurozone of U.S. President-elect Donald Trump.
“We will have to see what the new U.S. government’s policies are. It could be that tariffs put the brakes on growth globally, although I … hope that will not be the case,” he said. “Any move away from free trade will by definition lead to lower productivity and may lead to a lower equilibrium rate of inflation - which would again lead us back to the interest rate policy we had in the past.”
The ECB still lacks an understanding of how unconventional monetary policy helped produce inflation in the period before 2021, he said, adding that this was something he hoped would be discussed in the next strategic review.
“I have an apprehension that we are moving back in the direction of a past that we still do not properly understand,” he said.
But the ECB should keep its 2% inflation target, Holzmann said.
“I know that some people have wondered about whether we should increase it, and there are also those who believe we should have it at zero. Two per cent seems to me like a good compromise, while also avoiding the negative impacts on wealth distribution a higher target might have especially for lower income groups.”