Holzmann: ECB “not yet put on the brakes” on monetary policy
The announced expiry of the trillion-dollar Corona emergency program PEPP of the European Central Bank (ECB) is not yet a turnaround in monetary policy for OeNB governor and ECB councilor Robert Holzmann.
“You have slowed down, you have not yet stepped on the brakes,” said Holzmann on Wednesday at the presentation of the OeNB economic forecast for Austria. The ECB “did not want to slow down the upswing”.
In mid-December, the Governing Council decided to end the PEPP bond purchases by the end of March 2022. The key interest rate was left at a record low of 0.0 percent. After the ECB’s bond purchases have expired, repayments due in the euro zone are to be reinvested until at least the end of 2024.
For Holzmann, the Eurosystem has “fulfilled its price stability mandate” since the common currency was founded. The HICP inflation rate in the euro area in the corona year 2020 was 0.3 percent and is expected to climb to 2.6 percent this year due to the sharp rise in energy prices. An increase in inflation to 3.2 percent is forecast for 2022. “But as with all these things, you are ready to do more, if the values next year will show something else,” said the OeNB governor.
If inflation rates do not decline as expected, “then the alarm bells are ringing,” said Holzmann. “In the council, we can at any time reduce or suspend the purchases that are still outstanding in the APP (Asset Purchase Program, note).” That would then also be a price signal to the markets, because it has been stipulated that interest rates will be increased after the end of the purchases. “In extreme cases” it would be possible to suspend purchases this year and increase interest rates at the end of the year or at the beginning of next year.
Should inflation rise “extremely, extremely, then one could” imagine raising interest rates beforehand and not waiting until the purchases run out in order not to worry the markets, “said Holzmann I received a lot of support from the Council, but it is not very likely.
In 2023 and 2024, the inflation rate in the euro zone is expected to decline to 1.8 percent each. In the medium term, the European Central Bank is aiming for an inflation rate of 2 percent. If inflation falls back to 1.8 percent, the difference to the inflation target is “not that big,” said Holzmann. However, there are differences in the Governing Council on upside risks in inflation. “I will not provide any information about my behavior at the meeting,” said the Governing Council and OeNB Governor.
“The inflation dynamics in the first year surprised us,” said Holzmann. The rise in oil and gas prices, as well as supply chain disruptions and computer chip shortages, would have fueled inflation. One should be “very vigilant” about inflation.
cri / ivn
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