By Balazs Koranyi
WASHINGTON (Reuters) – The European Central Bank should cut its inflation target and must rethink its policy approach as negative interest rates could endanger the bloc’s financial system, Austrian central bank Governor Robert Holzmann said on Friday.
Having undershot its inflation target of almost 2% since 2013, the ECB cut rates deeper into negative territory last month and said it would restart asset purchases, igniting a rare public debate as a growing number of policymakers question the value of its deep foray into unconventional monetary policy.
“In an environment of highly fixed inflation expectations, it becomes too expensive and difficult to reach the target, you need too much liquidity to do it,” Holzmann told Reuters in an interview during the IMF and World Bank fall meetings in Washington.
“Even if you can reach it, it’s useful to think of a lower target, which could be 1.5%, which is my preference. But if somebody said 1.2%, I would not say no either,” said Holzmann, who also sits on the ECB’s rate-setting Governing Council.
Incoming ECB chief Christine Lagarde, who takes over from Mario Draghi on Nov. 1, has already promised a broad strategy review, and most observers expect the ECB to better define its target and how it would reach it.
Holzmann, one of the newest members of the ECB’s policy panel, said negative interest rates are not sustainable over the long term and some of financial sector player simply can’t adjust.
“Insurance companies and pension funds have no way to neutralize the negative rates and it becomes impossible to provide the rates of return individuals expect,” Holzmann said.
He argued that given low returns, insurers and pension funds must take on more risk, which could then endanger financial stability.
Holzmann also noted that ultra-low pension returns endanger European efforts to supplement a public pension system with a private pillar, another reason for the ECB to change its approach to negative rates.
The ECB does not normally take votes at meetings, but Holzmann said that voting and making voting records public, much like the U.S. Federal Reserve does, would improve transparency and accountability.
“Independence, which is what we expect for ourselves, requires accountability,” Holzmann said. “And what is the best way of accountability? It is that you stick to your vote and how you vote becomes public.”
While many of his fellow policymakers see incoming data as weak and supporting the ECB’s decision to provide more stimulus, Holzmann said that there is also good news on the horizon.
The prospects of a Brexit deal are real and there are also indications that the euro zone economy has started to turn a corner, so a recovery is possible even without extraordinary stimulus.
Holzmann also noted that he hoped Lagarde would change how monetary policy is discussed and decided, staying open to the possibility of a very different approach to policy.
“When the next crisis hits, increasing quantitative easing and making rates even more negative won’t work,” Holzmann added.
(Reporting by Balazs Koranyi; Editing by Paul Simao)