June rate cut possible, but ECB can't ignore Fed, says Holzmann
The European Central Bank (ECB) may start cutting rates as early as June as inflation may be falling faster than expected, but its actions will be limited by the Federal Reserve's (Fed) actions, Austrian central bank governor Robert Holtzmann said on Wednesday.
"I don't have April in mind (for a rate cut). We will have more information in June," the ECB Governing Council member told Reuters.
"In principle, I am not against a rate cut in June, but I want to see the data first and I want to remain data dependent," said the monetary policy chief, considered by some observers to be the most conservative member of the ECB Council.
However, if the Fed does not cut rates in June, the market reaction to the rate differential between the two central banks will negate the impact of an ECB rate cut.
"If the data points to a rate cut in June, a week before the Fed's decision, we are likely to cut rates in the hope that the Fed will follow suit. If not, the economic impact of a rate cut is likely to be smaller," explains the head of monetary policy.
Salary
Robert Holtzman's change of position is due to lower inflation rates and weakening of the European economy. However, he noted that commodity prices have had little impact and that the decline in commodity prices is due to an increase in Chinese exports.
The governor also emphasized the risks to wages. "While wages pose a potential risk to inflation, we also see that the reduced pricing power of companies is forcing them to set lower prices," Robert Holtzmann noted.
From a longer-term perspective, the governor believes that inflation at 2% and productivity growth at 1% would be consistent with a 3% rate, assuming European productivity picks up.
"If the productivity gap compared to the US remains at the current significant level, even 3% would be considered too high," he added.
Banks
With the amount of excess liquidity in European banks and its placement with the European Central Bank reaching 3.2 trillion euros, Robert Holzmann is calling for a review of the conditions under which these reserves are rewarded by the ECB.
At a rate level of 4%, these liquidity reserves have led to a negative balance on the central bank's books.
"It is unacceptable that the current structure is burdening central bank accounts. We cannot maintain deficits indefinitely," the executive explained.
Last year, the ECB decided that 1% of excess liquidity would not be rewarded, and Robert Holtzmann favors increasing that percentage to 5-10%.
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