(March 14): Higher government spending could force the European Central Bank (ECB) to start raising interest rates again, Governing Council member Robert Holzmann told Germany’s Platow Brief.

Such measures would present a “very strong fiscal stimulus” that usually leads to more inflation, the hawkish Austrian official said in an interview published on Friday. “In this case, monetary policy would probably have to go in the other direction again.”

After six reductions, borrowing costs are already at neutral levels that no longer damp economic activity, with inflation risks tilted to the upside, according to Holzmann. He supports a pause in rate cuts in April.

“The next meeting will be about how many council members who have so far gone along with the proposal but have expressed concerns can then decide against a further interest-rate cut,” he said. “If we look at the global political situation, there’s a greater risk of a resurgence in inflation.” 

Holzmann was the only abstention at last week’s decision to reduce the deposit rate to 2.5% from 2.75%. In June, when the easing cycle began, he was also the sole dissenter.

Markets have recently pared bets on easing this year after European plans to significantly increase defence outlays and Germany said it would boost infrastructure investments.

Some analysts have even started discussing the possibility of hikes, most likely in 2026. Holzmann’s Finnish counterpart, Olli Rehn, said this week that higher military outlays won’t “necessarily” lead to slower reductions in borrowing costs.

In his interview, Holzmann said he abstained last week mainly because of the ECB’s accompanying statement, which said policy “is becoming meaningfully less restrictive,” rather than is simply “restrictive,” as it had said before.

“This means that if we want to change this and stop monetary policy from being restrictive, we need to lower interest rates further,” Holzmann said. “My assessment is that we are already in neutral territory.”

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