ECB Hawk-Dove Ranking: Kazāks Ranked a Notch Less Hawkish; Wunsch Unchanged Despite July 22 Opposition

17 August 2021

By David Barwick – FRANKFURT (Econostream) – Econostream’s latest ranking of the members of the European Central Bank Governing Council in terms of hawkishness/dovishness reflects only one small change, with another potential change considered but rejected.

The change affects the position of Mārtiņš Kazāks, Governor of Latvijas Banka. Previously at 1.0 and thus ranked alongside his Estonian counterpart, Madis Müller, Kazāks is now classified as a touch less hawkish at 0.75 and thus squarely between Müller and the third Baltic member of the Council, Lithuania’s Gediminas Šimkus, who is also the newest member.

The revision of Kazāks’ ranking is based on the extensive interview conducted with him by Econostream some three weeks ago. In it, he urged a cautious approach to monetary policy, expressed dissatisfaction with the inflation outlook, was guarded on economic prospects and largely endorsed the ECB’s actions.

Some examples include:

  • Inflation expectations have improved, but are still well below 2%. When we look at other measures of inflation, we also don’t see them indicating inflation robustly and sustainably at 2%.
  • But if anything, what we have learned from the past is that we should not make the mistake of premature tightening.
  • By and large, I think the Council has been very correct in its assessment and the balance of risks.
  • But there is still the downside, and of course the best example of that is the Delta variant. We don’t know what’s going to come out of that. So we have to be cautious, and this cautiousness will also guide our policy decisions.
  • But supply bottlenecks are another important risk to growth. If these things don’t get resolved, they will slow down the recovery.
  • I think at the current moment, it’s still premature to talk about phasing out the PEPP … but when we get closer to this date, then we will consider what support the economy needs, what instruments are better used, and how we should change – if necessary – the instruments already deployed. It is going to be discussed, but at the moment there’s no need to do so.

On the other hand, Kazāks did not agitate in the manner of Council doves for greater or longer accommodation, and while his views were fundamentally aligned with the ECB, he was also willing to contemplate more hawkish perspectives than many of his colleagues. Examples of this include:

  • We are not behind the curve, but if the economy surprises to the upside, then we will move more quickly than we currently envisage.
  • If we take a look at the inflation forecast, then … I would be somewhat more optimistic towards the end of the forecast horizon. What has been done in terms of the strategy update (to reduce perceived asymmetry from the “close but below”) and forward guidance (explaining rate lift-off), as well as of fiscal developments in the US, can make me more optimistic.
  • If we see significantly less uncertainty and significant economic strengthening, then we will communicate accordingly [about asset purchases].
  • When we see that inflation is meeting certain criteria in line with our strategy and our forward guidance, of course we will move with both asset purchase levels and interest rates. That’s why fiscal policy also has to be forward-looking.

Ranking 25 ECB Governing Council members in terms of their relative hawkishness/dovishness is, as we have noted before, less a science than an art. The differences are more readily apparent at the extremes, and Kazāks seems closer to the middle than to an extreme, albeit clearly on the hawkish side of the middle. Hence, 0.75.

Whether he would be better left at his previous 1.0 rather than deemed marginally less hawkish might be a subject for debate in the eyes of some. As Kazāks said to Econostream on the subject, his relative position on the Council ‘depends on the situation.’

Econostream’s ranking is in any case not written in stone. Whilst shunning major and frequent changes, should a different situation justify shifting the Latvian governor on our scale back towards his German and Dutch colleagues, we will make the change. Of course, that works in both directions.

As for the change we considered but ultimately decided against, this concerns Belgium’s Pierre Wunsch. He and Bundesbank President Jens Weidmann were the lone holdouts to oppose the new forward guidance agreed by the Governing Council on July 22.

That is a somewhat unusual constellation, given Weidmann is well known as being at the hawkish end of the spectrum, whilst Wunsch comes from a central bank better known for sending very dovish policymakers to Frankfurt.

One of the reasons that this did not lead to a more hawkish ranking for Wunsch is that we already ‘upgraded’ him at the end of April from -0.5 to -0.25, after he had given yet another interview in which – not for the first time - he defied immediate hawk/dove classification but seemed to provide more fodder for hawkish argumentation.

Another reason has to do with the nature of his objection to the July 22 decision, which he accounted for by saying that ‘it boils down to the kind of commitment you can take over a possibly long period of time’. The principle involved might have led him to take the same position were a hawkish monetary policy move at stake under otherwise identical circumstances.

In the end, and as we wrote on May 5, we do not consider Wunsch to be a hawk, even with his willingness, as we said then, to ‘raise pointed questions’. That has not changed, at least not yet.