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Nowotny's Cassandraic warnings

Ewald Nowotny, governor of the Bank of Austria, has long been counted as having one of the more hawk-like squawks among members of the European Central Bank's governing council. But even he caused a shock this week with his discussion of impending rate hikes.

The euro spiked on the news and Bunds gapped out as he suggested that the ECB could stop its €30bn per month asset purchase programme cold in September.

The ECB quickly poured cold water on the furore, rushing out a statement to the effect that Nowotny spoke for himself and not the council.

But Nowotny has a point. The European economy has been growing with more vitality than its counterpart across the Atlantic for months, where the US Federal Reserve is already deep into its tightening cycle.

Given the growing concerns over toppy, overheated markets and unsustainable debt burdens, the ECB should be itching to reload some of its monetary policy tools in preparation for what some believe is an incipient downturn.

With rates in negative territory, the ECB will have scant options available to combat slackening growth. Its obsession with inflation metrics may prove misguided if the last few months retroactively prove a peak of productivity and growth (although a lack of structural reforms from Europe’s governments to promote wage growth must also be blamed).

Nowotny’s comments notwithstanding, the ECB will not abandon its hothousing of European growth at this stage. A tender withdrawal from quantitative easing lies ahead, and an equally gentle approach to rate hikes will follow. We shall see how deep ECB president Mario Draghi or his successor’s bag of tricks is if a recession arrives before we have restored the traditional ammunition with which to address it.