VIENNA – The European Central Bank is unlikely to discuss cutting interest rates seriously before June, Governing Council member Robert Holzmann said in an interview with POLITICO on Wednesday.

And while the Austrian National Bank Governor expects a lively debate about policy easing in June, his best bet is that the ECB won’t move even then.

“We will decide based on the data. If the data is not there, there will not be a decision — and for good reason,” Holzmann said, indicating there was a reluctance to blindly believe in models. “Central banks got attacked over the failure to accurately project high inflation and they are now trying to avoid making the same mistake.”

Holzmann’s comments cut straight to the heart of why the ECB isn’t cutting interest rates even though the eurozone economy has barely grown in the two years since Russia invaded Ukraine: it doesn't want to lose face. Inflation has taken a huge bite out of people’s living standards, exposing the bank to intense scrutiny and sometimes ferocious criticism.

In an annual report on the bank’s performance earlier this week, the European Parliament said the ECB risks losing its credibility if it doesn’t quickly bring inflation back to its 2 percent target.

At the same time, pressure is growing on the Bank to extend some relief. Advance indicators such as manufacturing orders and credit growth show little sign of a pickup any time soon.

Several members of the Parliament have urged the ECB to cut rates immediately to avoid strangling the economy, with one controversially waving a noose at Christine Lagarde this week to drive the point home. 

April is the snooziest month

The Governing Council wants to see “an actual and lasting reduction in headline inflation but also in core inflation” before cutting, Holzmann said. That will hinge largely on wage developments, the key input for services, which makes up the vast bulk of the eurozone economy.

Rate setters next meet on March 7, when they will produce fresh forecasts for growth and inflation, but many in the Governing Council have clearly signaled not to expect any major policy announcements then.

Nor will the ECB cut rates at its April meeting given the lack of information, Holzmann suggested. “We may have some wage data but most likely it won’t be sufficient and we won’t have the broader macro view on the data,” he said referring to the absence of new ECB staff forecasts for growth and inflation projections, which as usual will only be available a month later. “I don't recall at least during my time that any decision to change interest rates was taken in April.”

Financial markets see a first quarter-point cut in June as certain and see the ECB as likely to cut the key deposit rate from its current record high of 4 percent to 3 percent by the end of the year. That represents a significant scaling-back of expectations from earlier this year, when some expected a first cut in March and a deposit rate of only 2.5 percent by year-end.

But Holzmann remains unconvinced.

While he predicted that “there will be a lot of discussion”, with some of his fellow rate setters expected to push for a move in June, this is not his current baseline.  “My conjecture is to say we won't move before June in any case, but also not before the Fed,”’ he said, recalling that the Federal Reserve has typically led its peers in beginning new rate cycles.

Financial markets expect the Fed to start cutting at its policy meeting on June 12. The ECB’s June policy meeting is scheduled for the 6th, implying that Holzmann doesn't expect a first cut before the July 18 meeting.

Holzmann gave no indication of how many cuts he thought were likely this year, noting that “everything is possible” — including no cuts at all, given the uncertainty about wage developments and possible fallout from geopolitical tensions on prices. The lack of any sign of a lasting peace between Israel and Palestine risks keeping up inflation pressures, he added.

Green dreams

To boost Europe’s growth prospects, the continent must get real about its energy policies, Holzmann said, especially in the light of still-wide public deficits and green transition costs. 

Holzmann also signaled his unease about the ECB’s self-appointed role in fighting climate change, which has turned into a hotly topic in recent days: the parliament expressed “grave concern” at suggestions of political bias within the institution, after executive board member Frank Elderson vented at an internal event about staff who didn’t buy in to the project.

While Holzmann expressed support for the work the ECB is doing to incorporate climate change into its modeling, he said he was “skeptical” of the ECB including green considerations in its monetary operations and supervisory functions because it is simply too fine-tuned.

“My sense is that this requires too much information, which we don't have,” he argued. “And as an economist of the Austrian School, I believe information is better guided by the markets than by bureaucracy.”