ECB’s Kazāks: No Need Now to Cut Rates in 1H, but if Situation Changes, Our Decisions Might Change

6 December 2023

By David Barwick – FRANKFURT (Econostream) – There is no currently apparent need for the European Central Bank to ease monetary policy in the first half of next year, making discussion of rate cuts premature, but a change in the situation could lead to another outcome, ECB Governing Council member Mārtiņš Kazāks said Wednesday.

According to a presentation intended for his use at an MNI event, Kazāks, who heads Latvijas Banka, reiterated the view that ‘discussion on rate cuts is premature’ and described monetary policy at present as ‘maintaining a steady hand, but keeping an eye on risks (on both sides)’.

‘Given current economic outlook and medium term-projection baseline, no need for rate cuts in 1H 2024, but, if the outlook changes, and the balance of risks for price stability shifts, also our decisions on rates might change’, he said.

Interest rates were now at levels that were ‘contributing forcefully´ to a return to price stability, and it was appropriate to emphasise ‘the speed and extent of monetary tightening’ as previous tightening feeds through, he said.

Monetary policy should be ‘at sufficiently restrictive levels for as long as necessary’, with the level and duration to be determined by data, he said, mentioning the three previously defined foundations of the ECB’s assessment.

Inflation was currently coming off highs as the lingering effects of shocks washed out, he said. The inflation path was ‘likely to remain bumpy’, he cautioned, with a ‘clear peak in wage growth still to be seen’ and, similarly, ‘no clear decline in profit margins visible yet’.

Still, he said of inflation's general tendency of late, ‘In terms of momentum, there has been a nice and consistent downward trend since spring’. Moreover, long-term expectations were anchored, he said.

Overly expansionary fiscal policy presented a risk to price stability that could require interest rates to remain high for longer, he warned.

Kazāks urged again a reduction in the size of the Eurosystem’s balance sheet, which he said was ‘to be reduced in a gradual and orderly manner, but no reason to linger on’.

With respect to the economic outlook, short-term prospects were ‘subdued and weak’, he said. Geopolitical developments were ‘the main risk contributing to the fragmentation of the global economy’, he said.