MNI INTERVIEW: June Cut Not Done Deal - ECB's Holzmann

The European Central Bank is more likely to cut rates in June than April, but cuts will depend on inflation projections being confirmed, the governor of the Austrian National Bank told MNI in an interview, stressing that wage data and geopolitical risk are key and that the ECB should remain data-dependent.

“We have reason for some optimism. At the same time, we have been misled by projections before, so let's stay data-dependent and open to acting when we need to act, but also not acting prematurely,” Robert Holzmann said in an interview.

Eurosystem projections show inflation converging to the ECB’s 2% target sustainably in 2025, he noted, adding “But there are some residual doubts as to whether this will be the case.”

Wage gains remain particularly strong in Austria, Germany and the Netherlands, and it remains to be seen how much employers can and will absorb increased labour costs, he said, speaking after other policymakers have signalled that a cut is likely in June.

“The vision for June is very much related to the extent to which our projections turn out to be true. But it might be that some of the assumptions built into those projections are somewhat optimistic, so we have to remain data-dependent,” he said.

WAIT FOR PROJECTIONS

As to the possibility of a cut in April, he noted that there will be more but not sufficient wage data by that month’s meeting.

“We also won’t have any ECB projections, so it could be premature to make a judgement,” he said. (See MNI INTERVIEW: ECB Inflation Sceptics Hold Upper Hand-Scicluna)

High levels of geopolitical uncertainty - particularly around the Middle East - remain a constraint on monetary policy, though their effect could go two ways, he said. Disruptions to European supply chains could push up commodity and energy prices and add to inflation, but they might also be disinflationary if growth is impacted negatively.

While Holzmann was optimistic that inflation is close to being brought under control, geopolitical risks to prices tilt more to the upside, despite downside risks including those related to a slowing China.

“China is struggling. It may be that the economic problems there are stronger than feared, and this could take a few tenths of a percentage point from European growth rates, which in turn would have a disinflationary effect and mean rates have to go lower.”

FED RATES CUT TIMING

Holzmann noted that cutting rates before the Federal Reserve would also entail risk.

"If and as the data are strong enough for the ECB to cut first then it could happen, but it is not without risk of some market repricing - especially if the Fed decision is linked to some sudden, major change in inflation or employment data,” he said.

“Europe is not the 13th district of the Fed, but what the Fed does matters.”