MNI INTERVIEW: ECB's Toolbox Sufficient-Austria's Holzmann

The outlook for the eurozone economy is improving sufficiently for the European Central Bank's existing toolbox to provide any necessary stimulus once net purchases under the Pandemic Emergency Purchase Programme conclude in March, the governor of the Central Bank of Austria told MNI.

Barring any significant setback there would be no reason to continue PEPP beyond its agreed horizon, after which tools such as the Asset Purchase Programme, cheap loans for banks via Targeted Longer-Term Refinancing Operations, negative interest rates and forward guidance could be adjusted according to prevailing economic conditions, Robert Holzmann said in an interview.

"Currently, we have outstanding TLTROs of over EUR2 trillion, interest rates on the deposit facility are -0.50% and the monthly purchasing pace for the APP is EUR20 billion," explained Holzmann. "It could of course be imagined that one or the other adjustment takes place, but this would depend on economic conditions at the beginning of 2022, which is too far away to predict. We stand ready to accommodate as needed, but if the inflation projection changes we will change our assessment of the policy instruments."

POSSIBLE REDUCTION IN PURCHASE PACE

June's Eurosystem macroeconomic projections will guide the Governing Council regarding its management of PEPP, Holzmann said, but if conditions become more favourable over the summer there may be no need to buy bonds at the current pace.

"The question of when and how the ongoing PEPP purchases will be reduced or not will be determined by market conditions," Holzmann said. "It's less an issue of announcing something - yes, we may announce it, but we may purchase less, because this will depend on market conditions."

Looking beyond the crisis, the ECB cannot continue to ensure favourable financing conditions, potentially imposing more constraints on fiscal policy, he said.

"Once the pandemic is over public programmes have to be made much more targeted," he said. "During the pandemic extraordinary measures were necessary but once it's over we have to go back to normal."

Holzmann highlighted the re-entry into the labour market of people who lost their jobs as a result of the Covid-19 pandemic as a possible source of upside risk to the inflation outlook, with increased negotiating power leading to upward pressure on wages.

"Here the information is still outstanding, and this topic is not yet fully in discussion," he said, "but other countries like the U.S. will be an indicator for us of what's happening."

Asked whether tightening the collateral eligibility framework adopted by the ECB early on in the pandemic would lead to any cliff effects, even were the economy booming, he was non-committal.

"You may also have an alternative mechanism which goes in the opposite direction," he said, "but for the time being I don't see that there's a need to intervene, in order to make sure there won't be real cliff effects which would change the environment and the financial markets situation."