Exclusive: ECB’s Kazāks: Would Not Exclude that We Need to Take Stronger Action in July

28 June 2022

- Kazāks: ‘Fair case to discuss whether 25 basis points in July are still appropriate’
- Kazāks: ‘We should always keep the door open to discussion’ and not carve each step in stone
- Kazāks: Observing indications of expectations mounting; this could justify bigger rate steps
- Kazāks: Increased risk of nonlinearities means frontloading rate hikes would be reasonable
- Kazāks: ‘See further increases in our rates in the remaining meetings at the end of the year’

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council Mārtiņš Kazāks on Monday warned against closing the door to the possibility that new data would warrant hiking by more in the coming months than currently generally envisaged.

In an interview with Econostream (see full transcript here), Kazāks, who heads Latvijas Banka, argued that the ECB’s various principles meant ‘that each and every time we take a decision, we have to look at the data and discuss whether the decision is appropriate.’

‘We shouldn’t carve in stone each step along the path’, he said. ‘A few weeks back, 25 basis points in July and 50 in September were the baseline case for me. But it doesn’t mean that this is necessarily how we should ultimately move.’

Data regarding the evolution of inflation expectations, for example, which by some indications are climbing, made for ‘a fair case to discuss whether 25 basis points in July are still appropriate’, he argued.

Although a July hike of 25 basis points was taken as somewhat of a given at the last Governing Council meeting less than three weeks ago, ‘we should always keep the door open to discussion’, he said.

‘I don’t see the reason at this moment, with three weeks still to go, to discard the opportunity to readjust our actions at the time we take them’, he said. ‘It’s the same with September: we will have more data, including a new macroeconomic outlook, and this is another opportunity to reassess what the most appropriate step is. So, I’m not closing the door to anything.’

An important aspect of the current situation is the increased risk of nonlinearities, which ‘implies that frontloading interest rate increases would be reasonable’, he said. ‘Twenty-five basis points in July would be a reasonable first step, but I would not exclude that the market situation changes between now and then and that we need to take stronger action.’

Inflation was unlikely to magically subside, he observed, with the war appearing set to persist and thus to continue exerting pressure on the prices of raw materials. ‘So, 25 and 50 are the baseline scenario, but with inflation risks on the upside, we may need to make a somewhat stronger decision’, he said.

With uncertainty very elevated, it is difficult to make statements about what the ECB will do beyond September, he said. ‘[A]ll I can say is that, keeping in mind that we will have a new macroeconomic outlook, I would see further increases in our rates in the remaining meetings at the end of the year’, he said. ‘So, we will by all means be significantly above zero by the end of this year. That’s what I would expect.’

With respect to the issue of fragmentation and a programme to deal with this, Kazāks agreed with Econostream’s assertion that ceteris paribus, such an instrument would foster tighter policy by removing a potential obstacle in the form of an adverse market reaction.

‘Problems with transmission shouldn’t be allowed to get in the way of our policy stance’, he said. ‘We already have measures, such as flexible PEPP reinvestments and OMTs. If necessary, the Governing Council will devise other measures. The commitment is there to ensure that there is no problem with monetary policy transmission.’

However, he noted that monetary policy was meant to concentrate on price stability, and that a range of policies outside of the ECB’s remit were relevant to the risk of fragmentation. Monetary policy therefore ‘is not and should not be the only game in town’, he said.

As to recent market adjustments, Kazāks called this ‘very fast-paced and, I would also argue, has run ahead of changes in fundamentals. It was too quick.’

It is natural for there to be spreads, given differences across economies, he said. ‘But the issue is how quickly they arise’, he continued. ‘If it happens head over heels and the spreads start to live a life of their own, then this can result in a vicious cycle with excess financial volatility and risks to financial and price stability. This needs to be avoided. So, the speed of adjustment is very important.’