ECB’s Kazāks: Current Dynamics of Inflation Make Reaching Our Target Very Likely

11 January 2022

By David Barwick – FRANKFURT (Econostream) – Current inflation trends suggest that the European Central Bank is very likely to achieve its price stability target, in which case monetary policy will react appropriately, ECB Governing Council member Mārtiņš Kazāks said Tuesday.

In an online conversation, Kazāks, who is Governor of Latvijas Banka, attributed the comparatively advanced stage of American monetary policy to the US being ‘simply much more advanced in economic recovery.’

‘And do not doubt that ECB will react when we will see it necessary’, he continued. 'In fact, the December decision already shows that we have decided to stop PEPP pandemic programme, okay, at the end of this quarter. And so we are reducing support to the economy.’

The euro area is not yet far enough along in the business cycle for more, he said. ‘But when we will see that we are at our target of our medium-term 2%, then of course we will react accordingly’, he said. ‘And, with the current dynamics of inflation, it seems that this is a very likely possibility that we will reach this target.’

‘That means that if our forecast, which we will have again in March, and June, if we will see it necessary, we will act. … monetary support has been very important for the economy to survive this crisis, but it will not go on forever’, he added. ‘We will start reducing it. Rates will go up, and fiscal policy has to take note of that.’

The Governing Council is flexible and data-driven and can alter its policy stance at any monetary policy meeting, he said.

Although the pandemic remains an issue, ‘it seems that it is gradually waning’, he said. ‘We have the vaccine, and that will help us solve this problem.’ Moreover, ‘the economy is learning to live with it and the negative impact is smaller with every wave’, he said.

Kazāks insisted that monetary policy not be left to ‘deal with all the problems’, as its primary objective is price stability.

‘So when we see economy rebounding, when we see that the negative effects of Covid are phasing out, of course we will start to reduce our support’, he said. ‘And that means that fiscal and structural policies will become responsible for other elements in much more obvious way than it has been during the crisis.’

The massive policy support during the crisis means that scarring will be less than initially feared, he said.