Exclusive: ECB’s Kazāks: Haven’t Kept Current Tight Policy in Place Long Enough

28 February 2024

By David Barwick – GHENT, Belgium (Econostream) – It remains too soon for the European Central Bank to consider the current level of monetary restrictiveness to have been maintained long enough, given uncertainty about developments and the need to avoid a resurgence of inflation, Governing Council member Mārtiņš Kazāks said Friday.

In an interview (transcript here) on the margins of a EUROFI conference, Kazāks, who heads Latvijas Banka, readily acknowledged that authorities saw ‘very clearly that there are disinflationary processes at work and that monetary policy transmission is effective.’

‘We are in a relatively good situation’, he continued. ‘But can we already say that we are done? No, not yet.’

Policymakers still had to observe the evolution of ‘various elements’ in their quest to ward off a rebound of inflation, he said. Once sure on this count, policy decisions would reflect that, but the timing remained data-dependent, he said.

Although the March Governing Council meeting would bring the important additional information of the revised projections, there wasn’t ‘one single path’ to price stability, and rate cuts could come sooner and be smaller or come later and be bigger, as well as be distributed over time unevenly, he said.

‘All this is going to be part of the discussion when the time comes’, he said. ‘Yes, there have been a couple of positive inflation surprises over the past month, which is good. But let's not get ahead of ourselves.’

A lesson to be drawn from the experiences of the 1970s and 1980s was that ‘there is a risk of moving too early’, he said, and ‘it would be a very bad outcome if we moved too early and were then forced to hike interest rates again to tame resurgent inflation.’

‘That scenario should be avoided’, he said.

It was in any case only ‘a matter of meetings, which is a question of months or quarters’, until, barring an unexpected development, the first rate cut would come, he noted. He dismissed talk of the ECB getting behind the curve, observing that such a judgment would imply a unique path to the ECB’s target, when in fact there were many.

‘I have a hard time imagining us being massively late; we are reading the same data that the market is reading’, he said. ‘What we know is that inflation has a trick up its sleeve, and that is stickiness, which we’ve seen in the past. We have to make sure that this trick is not played on us this time, and our data-driven approach to gaining the necessary confidence is very appropriate.’

The fact that there was not much difference economically between starting to loosen policy in April or in June did not mean that the risks were distributed equally, he suggested. Labour markets were still robust, and the economy was merely going through ‘a somewhat soft patch rather than a sharp and deep recession’, he said.

‘We’re not going to drag things out forever’, he said. ‘But rushing in this case would be risky. So, let’s see the data.’

Kazāks reminded that market rate expectations were among the underlying assumptions of the macroeconomic projections due to be updated at the upcoming monetary policy meeting.

‘So, lower rates are already kind of baked into the forecast’, he said. ‘If we very smoothly slow down to 2%, do we need to cut more than that? Why? We're just losing policy space, potentially just pushing up inflation.’

The present situation called for patience, he urged.

‘Let's make sure that the problem is really resolved before we start cutting rates’, he said. ‘The prospect of tightening again because of having started the process too early is a nasty one. Then the economy would really need to suffer.’

It should be recalled that some important data, in particular with respect to the labour market, would only be available ‘later in the spring’, he said.

Still, patience should not be understood as reluctance to respond promptly to any sudden changes, he indicated.

‘If the data tell us so, we can move very quickly’, he said. ‘But let’s wait for the data to tell it. At the moment, I don't see the data telling us to move.’