EXCLUSIVE: ECB’s Kazāks: War to Make Us More Careful, But Doesn’t Automatically Put Us on Hold

2 March 2022

By David Barwick – FRANKFURT (Econostream) – Russia’s military aggression will lead the European Central Bank to approach monetary policy normalisation with greater caution but does not necessarily imply a full stop, according to ECB Governing Council member Mārtiņš Kazāks on Wednesday.

In an interview with Econostream (transcript here), Kazāks, who is Governor of Latvijas Banka, said that the ‘massive game-changer’ geopolitically of the Russian invasion of Ukraine would probably protract further the period of high inflation, but also have a negative economic impact, with both effects ‘non-trivial’.

He declined to rule out completely a 2022 rate hike, noting simply the need for monetary policy to exercise increased caution while also emphasising that being gradual did not mean getting behind the curve.

Similarly, while he said ending asset purchases in Q3 might remain feasible, he urged that the situation first be thoroughly evaluated.

With respect to the euro’s recent weakness, Kazāks noted that though the exchange rate was viewed solely through the prism of inflation, verbal intervention was not ruled out.

Here are the key quotes from the interview:

‘Last week was a massive game-changer in geopolitical terms. And of course, geopolitics has a direct impact on the economy and on policymaking. The outlook has become more uncertain.’
‘The two major short-term implications in my view are that inflation will be higher for longer mainly due to energy and food, and economic activity will suffer because of trade interruptions and confidence effects on top of pre-existing supply constraints. And in my view, the implications for both inflation and growth are non-trivial. So the war adds quite a few negatives to the outlook. But as such, war is likely to lead to more cautious and more careful actions in terms of normalizing monetary policy.’
On hiking in 2022: ‘… we should not pre-empt our own actions too far into the future. It’s still too early to say, but the increased uncertainty makes me more cautious. On the other hand, gradual does not mean slow and behind the curve. If necessary, we can be gradual and still step up the pace.’
‘In terms of the pandemic emergency purchase programme, it should end in March. The negative impact of the pandemic has faded. In terms of the asset purchase programme, we will discuss the implications at next week’s meeting. I would not jump to any conclusions. Let us be pragmatic.’
On ending asset purchases in Q3 of this year: ‘Let’s reassess the implications of the current situation and then draw conclusions. Ending them in Q3 is still possible. But under such high uncertainty, let us first assess the situation.’
‘There have been upside inflation surprises consistently for some time, and supply bottlenecks are not easing as quickly as initially expected. Energy price pressures are there and inflation has gotten broader. There is a risk of inflation becoming entrenched. On the other hand, the good news is that inflation expectations are still around 2%. We do not see de-anchoring. That gives us flexibility and allows us to be gradual. Labour markets are strong and we see wage pressures building in the pipeline. But we haven’t seen this materialise in wage data yet. Overall, it is not only supply factors and there has been a growing demand element in driving inflation dynamics, which cannot be looked through by monetary policy. But here again, we need to think about this in terms of what the outbreak of war means.’
‘Now there is a massive new element of uncertainty and it is negative. I would not agree that this automatically puts on hold monetary policy normalisation. All I’m saying is that we need to take reassess things next week and then communicate how we see the new situation. Ultimately, we need to normalise monetary policy, and we cannot forget about this. When exactly and at what pace, we will see during our discussions.’
On verbal forex intervention: ‘We have seen elements of that in the past at certain moments in time, and I do not exclude that. But it has to be viewed through the lens and in the context of inflation developments. It’s not the exchange rate per se.’
On what to expect from next week’s meeting: ‘An analysis of the first impact of recent developments on inflation and growth. A confirmation of the end of PEPP – I expect no change in that respect. And then we should have a discussion about the pace and duration of asset purchases. I would not expect specific decisions on interest rates; it’s too early for that.’