ECB must keep restrictive policy on price risks

EUROPEAN Central Bank monetary policy must remain restrictive given lingering inflation risks, according to Governing Council member Robert Holzmann.

With wage gains in parts of the region still too strong and geopolitics posing threats to price stability, a return of inflation to the 2 per cent target isn’t fully assured, the Austrian official said on Thursday (Nov 21) in an interview in Vienna. Similarly, while an interest-rate cut in December is the most likely outcome, it isn’t certain, he said.

“It’s not yet guaranteed that inflation will sustainably reach 2 per cent, and as long as there are risks to that end, we mustn’t lower our guard,” he said. “Removing our pledge to keep policy as restrictive as needed for as long as needed at this point would be premature.”

Keeping policy tight is currently part of the statement that the ECB publishes following its rate meetings. That language is likely to come into focus as the ECB gears up for a fourth quarter-point reduction on Dec 12.

While dovish officials like Italy’s Fabio Panetta worry about inflation dipping below 2 per cent and want a bolder commitment to aiding the region’s struggling economy, hawks such as Holzmann continue to urge caution.

“Warnings that inflation is at risk of undershooting our target aren’t warranted,” he said. “Price pressures in services are still high, some of the latest wage deals still aren’t in line with our goal and geopolitics pose additional risks.”

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Indeed, this week saw data showing a key gauge of eurozone wages jumped by the most since the euro was introduced in 1999. In the US, the return of Donald Trump to the White House has heightened fears of trade tariffs.

That said, policy may well be loosened again in three weeks.

“A cut in December seems likely from today’s perspective,” Holzmann said. “But it’s not yet a done deal.” BLOOMBERG