Robert Holzmann, the head of Austria’s central bank and a noted hawk of the European Central Bank (ECB), has conveyed his belief that a further decrease in borrowing costs may be necessary before the year concludes. Holzmann was the only opponent to the rate-cutting decision by the governing council in June. However, he supported the recent reduction of a quarter-point, which brought the deposit benchmark rate to 3.5 per cent.
According to Holzmann, monetary policy is currently moving in a desirable direction. he noted that an easing path has begun and headline inflation is steadily decreasing. He predicted another quarter-point reduction by December, as long as no obstacles, like a surge in energy costs, emerged. He added that it could be possible to lower borrowing costs to roughly 2.5 per cent by the middle of 2025.
Holzmann, who is scheduled to step down from the central bank in August, emphasised that the ECB must stay watchful and closely monitor services inflation that remains persistently high at 4.2 per cent. Despite this, he argues that inflation is now less of a concern than when rates were initially reduced in June.
Previously, the governor highlighted concerns about inflation and a general sense of uncertainty. However, he now argues that this uncertainty has notably reduced over the recent months, bringing economic activity more in line with ECB projections. Nonetheless, the ECB revised its growth forecasts downwards on Thursday.
Headline inflation in the euro area dropped to 2.2 per cent in August, a decrease from 2.6 per cent in July, which is close to the ECB’s target of 2 per cent. Concerning lowering rates, Holzmann noted his opposition was mainly due to timing issues.
Anticipating a temporary surge in headline inflation in forthcoming months, Holzmann forewarned about a potential communications hurdle for the ECB. He clarified this would merely be a statistical irregularity due to base effects and urged rate setters to ignore this momentary fluctuation.
The European Central Bank (ECB) has shared its projections on Thursday regarding an anticipated inflationary surge “somewhat” through October to December which is supposed to subsequently drop to 2.2 per cent in 2025 and 1.9 per cent in 2026. This will influence a vast number of tracker mortgage holders who will enjoy the benefits of the fresh ECB rate cut.
Holzmann brought to light the challenging task of effectively communicating a transitory escalation in core inflation. He stressed the importance of transparency to maintain public faith in the central bank. He further cautioned that October might not be an ideal period for another reduction, as the ECB would only have access to a limited pool of new data related to economic trajectories. This sentiment is in line with an earlier official statement made by ECB president Christine Lagarde on Thursday.
Holzmann proposed that 2.5 per cent could likely be aligned to the reputed neutral rate, an intricate balance of monetary policy which neither extends nor holds back the economy. – Copyright The Financial Times Limited 2024.