ECB's Holzmann: No Barriers to December Rate Cut

As the European Central Bank (ECB) prepares for its December meeting, Austrian central bank chief Robert Holzmann has expressed his view that there are no compelling reasons to prevent a rate cut at this juncture. Holzmann's stance, as reported by a leading financial publication, reflects a growing sentiment within the ECB that the fight against inflation may require a shift in policy.
Holzmann's assessment is informed by the recent unexpected drop in inflation to 1.7% in September, the lowest level since mid-2021. This development, coupled with the ECB's recent rate cuts and a stagnant economy, has led Holzmann to believe that a more aggressive rate cut could be considered in December to support growth. However, not all rate-setters share this view, with some, like Austria's Holzmann, believing that a 50-basis point cut is unlikely.

The ECB's next meeting is scheduled for 12 December, where the central bank will decide its next move. Holzmann's perspective on the ECB's communication strategy and forward guidance is crucial in shaping his stance on a December rate cut. He believes that a 50-basis point cut should not be ruled out, signaling a shift in focus from inflation concerns to growth challenges in the eurozone. Holzmann's confidence in inflation returning to target levels next year is a key factor in his support for a more aggressive rate cut. However, he acknowledges that the ECB should be as concerned about undershooting targets as it is about overshooting them, emphasizing the need for a data-dependent approach to policy-making.

Holzmann's concern for financial stability and market liquidity is evident in his support for a December rate cut. He believes that a 50-basis point cut could help resolve inconsistencies in asset pricing and restore stability in the investment landscape. This stance aligns with his view that the ECB should be as concerned about undershooting targets as it is about overshooting them. By cutting rates, the ECB can maintain ample liquidity, decoupling market pricing from traditional economic signals and supporting growth. However, Holzmann also acknowledges the need for caution to avoid moral hazard and financial complacency.
Holzmann's stance on a December rate cut aligns with the ECB's recent shift in focus, as seen in their September meeting statement. The ECB acknowledged that inflation had peaked and was expected to decline, signaling a potential pause in rate hikes. However, their June projections still anticipated a 2% inflation rate in 2024, which is at odds with Holzmann's bullish outlook. Holzmann's confidence in a December rate cut reflects his optimistic view of inflation returning to target levels next year, a stance not universally shared among ECB rate-setters.
In conclusion, Holzmann's view on a potential December rate cut by the European Central Bank is influenced by several economic indicators and data points, including the unexpected drop in eurozone inflation, the ECB's survey of professional forecasters, and the ECB's Governing Council's acknowledgment of weaker-than-expected economic activity. Holzmann believes that a 50-basis point rate cut in December should not be ruled out, as the ECB needs to balance its fight against inflation with supporting the fragile economic recovery. However, not all ECB rate-setters agree, highlighting the division among policymakers regarding the possibility of a December rate cut. The ECB's decision will be influenced by incoming economic and financial data, with a data-dependent and meeting-by-meeting approach. A rate cut could provide much-needed stimulus to the stagnant eurozone economy, but it may also hinder the fight against inflation, which has been declining but remains above target. The ECB must balance the need for growth with the risk of reigniting inflation, making the December decision a critical one.