TRANSCRIPT: Interview with ECB Governing Council member Kazāks on 02 March 2022

2 March 2022

By David Barwick – FRANKFURT (Econostream) – Following is the full transcript of the interview conducted by Econostream on March 02 with Mārtiņš Kazāks, Governor of Latvijas Banka and member of the Governing Council of the European Central Bank:

Q: Governor, what are your current expectations of the impact of Russian aggression on ECB plans to normalise monetary policy?

A: Let me first express my full support to the Ukrainians standing against the Russian aggression. 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. However, the ECB’s strategy is well suited to address shocks, because we are gradual, flexible, data-dependent. This means that we can assess the impact of the latest developments and then act gradually, guiding the market so as not to rock the boat, so that the adjustment can happen relatively smoothly. We will discuss these issues next week, but the outlook will be dominated by the war in Ukraine, which will have structural implications. 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. We just don’t know how widespread and deep the sanctions and their economic impact will need to be. That depends on Russia’s brutality to wage war.

Q: Would you go so far as to say a 2022 rate hike is now off the table?

A: We should stick to our modus operandi. We have a defined policy sequencing, according to which we stop QE before raising rates, and we have our elements of flexibility, gradualism and data-dependence. That means that under this increased uncertainty, 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.

Q: A rate hike wouldn’t occur until well later in the sequence, as you noted. Does the possible need to slow down the adjustment mean shifting out the end of asset purchases?

A: 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. The situation over the last week has gotten much more complex, so the answer is much less clear-cut than it was prior to the Russian invasion. Before last week, I took the view that QE needed to end in the third quarter of this year. Now there is a war in Ukraine and flash inflation reading for February significantly above the forecast. The appropriate approach is to assess the new situation and go step by step. The longer and more brutal the war, the deeper the sanctions will need to be and thus more changes to the economic outlook and monetary policy.

Q: So today you would not call for an end to QE in the third quarter.

A: 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.

Q: Originally, the new staff projections in March should have guided us on the way forward. But the cut-off date preceded the Russian military aggression. Are they still worth anything?

A: We’ll evaluate the impact of the newest developments on the forecasts. That will be one of the elements of our discussion next week. Of course, taking decisions based on outdated forecasts is not going to happen, so we will have to see what the view is when everything since then is also taken into account. Since the war is a very new development, the situation is still evolving and there will be a lot of uncertainty, which again calls for a much more cautious approach to policy. But in terms of the PEPP, I can say very clearly that the economy has emerged from the need for emergency support, so there is no need to reconsider its end in March. Other asset purchases will be discussed, in particular the pace and volume, but given the uncertainty, we should not tie our hands or make any promises that are not credible under current circumstances. We have meetings every six weeks. If necessary we can also meet more often. We can make decisions when we need to and can keep markets informed about our thinking as we go.

Q: What do you make of the latest inflation data, which do not suggest that things in that regard have gotten any better?

A: 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.

Q: One of your relatively hawkish colleagues I spoke to recently was concerned about the possible exploitation of the geopolitical situation by Council doves to slow policy normalisation more than warranted. Indeed, we’ve seen some doves come out already and advocate not doing anything. Is the war going to be exploited to maintain monetary accommodation too long?

A: In my own view prior to the war, the situation was quite clear with regard to QE ending in the third quarter of this year, although with the flexibility to react more quickly if inflation developments warranted it. Gradual is by no means the same as slow. The economy had an outlook of strong growth, so that emergency support could be removed, and policy space gradually rebuilt with rates quite likely raised later in the year. 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.

Q: How much advance notification will markets be given about an end to net asset purchases and a first rate hike?

A: We can’t put a precise length on the time between the two. Similarly, if you ask what “shortly after” means, one cannot define this exactly. It will always be data-dependent. So it is a flexible wording– a week, a month, six months. It depends on the situation. We would want to guide the market so as not to rock the boat, and the earlier we can give such guidance, the better the market can adjust. But at the same time, one has to recognise that under this high uncertainty, being too specific about timeline and volumes can be counterproductive. Now, we need to ensure that high inflation does not get out of control, and we will do whatever is necessary for this. Current inflation levels are unacceptable. But as noted, inflation expectations are still around 2%. If they were to consistently exceed 2%, then of course I would see the need to become more aggressive.

Q: Wouldn’t removing the word “shortly”, which you mentioned, increase your flexibility?

A: In my view, it is redundant, and dropping the word would be neutral. But we should be careful not to be misinterpreted. If leaving it there causes fewer misunderstandings than removing it, then let it stay.

Q: And when you say it’s redundant, you’re saying that people shouldn’t infer from the word “shortly” anything about how much time will elapse between the two things.

A: Yes. It’s going to be data-dependent.

Q: The view was put forth just today by Deutsche Bank that the ECB should intervene to support EUR/USD against the backdrop of depreciation due to Russian military aggression. What do you think?

A: We don’t target the exchange rate. Of course, we monitor it because of its implication for inflation. But we wouldn’t intervene to target the exchange rate. Monetary policy decisions will always be taken through the lens of inflation.

Q: Might not some verbal intervention be appropriate nonetheless?

A: 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.

Q: All in all, what should we expect from next week’s meeting?

A: 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. Unfortunately, we are likely to see higher inflation, and there needs to be discussion of that and the role of monetary policy. The important thing here is that monetary policy is not and cannot be the only the game in town, which brings us back to all the structural issues. Monetary policy should not lose sight of the aim to normalise. And that is what we should do next week. But don’t expect to get all the answers on March 10. The situation is evolving.