Holzmann Sees Case for ECB Rate Hike If No Surprises Turn Up

The European Central Bank hasn’t defeated inflation and probably needs to raise interest rates again in September, according to Governing Council member Robert Holzmann.

(Bloomberg) — The European Central Bank hasn’t defeated inflation and probably needs to raise interest rates again in September, according to Governing Council member Robert Holzmann.

Chiming in with hawkish colleagues who are also pushing for another hike in borrowing costs, the Austrian governor said in an interview that the economy isn’t in danger of a recession, and tight labor markets mean labor unions may clinch large wage increases. 

“We’re not yet in the clear when it comes to inflation,” Holzmann said, adding that he’ll be watching all incoming information to assess the risks to prices.  “If there aren’t any big surprises, I see a case for pushing on with rate increases without taking a pause.” 

The remarks in the Austrian mountain village of Alpbach feed into an intensifying debate on one of the most suspenseful decisions since the ECB started raising rates in July last year, as officials judge whether the economy is weakening enough to suppress inflation, or if they need to deliver another hike. 

Holzmann has long been one of the most hawkish policymakers. Colleagues of a similar persuation from Germany and Latvia — Joachim Nagel and Martins Kazaks — signaled in Bloomberg TV interviews last week in Jackson Hole, Wyoming, that they’re leaning toward another increase too. 

Portugal’s Mario Centeno, a more dovish official, countered that emerging downside risks warrant caution. But Holzmann reckons this isn’t a moment to hesitate. 

“It’s better to achieve a peak rate faster, which also means we can eventually start going lower earlier,” he said. “It’s more difficult for markets to digest a stop-and-go rate path.”

He added that the ECB continues to be “somewhat behind the curve” in fighting inflation. Asked if that means rate increases could continue beyond September, he said “once we’ve reached 4%, then we’ll discuss again.”

Speaking alongside Holzmann at a panel in Alpbach on Monday, Nagel refused to elaborate on his most recent remarks about possibly favoring another hike. 

“I won’t give any signal here on what we will do in September,” he said. “We will wait for the numbers. This is what we agreed at our July meeting.”

Nagel, who is the president of the Bundesbank, added that when the ECB has finished raising rates, it may need to keep them high to fully feed through to the economy. 

“It might then be necessary to stay at this plateau for a while to see what might be the impact of what we did,” he said.

President Christine Lagarde, in a key speech at Jackson Hole on Friday, avoided sending any messages on the ECB’s upcoming decision — even though she recognized that inflation remains undefeated in the eurozone. 

Updated consumer-price figures for August will be released on Thursday, while a final assessment of the region’s economic performance in the second quarter will be available one week later. 

“The economy isn’t doing as well as we had hoped but at the same time, the slowdown isn’t so gigantic that we need to talk about falling into a recession,” Holzmann said. “We’re looking at a stagnating economy.” 

Against that backdrop, the ECB should consider speeding up the unwinding of its balance sheet, he added. While bonds purchased under an older program are currently allowed to roll off, reinvestments under its pandemic program — PEPP — are expected to run at least through the end of 2024.

“I’m a big advocate of starting the debate on ending PEPP reinvestments sooner than currently envisaged,” Holzmann said. “I appreciate its ability to address financial market tensions, but it’s time to step up” quantitative tightening.

(Updates with Nagel in 12th paragraph)

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