TRANSCRIPT: Interview with ECB Governing Council member Kazāks on 27 June 2022

28 June 2022

By David Barwick – FRANKFURT (Econostream) – Following is the full transcript of the interview conducted by Econostream on June 27 with Mārtiņš Kazāks, Governor of Latvijas Banka and member of the Governing Council of the European Central Bank:

Q: Governor, do you consider hikes of 25 and 50 basis points in July and September, respectively, to be written in concrete?

A: No. The principles of flexibility, optionality, data-dependence and gradualism – where gradualism means step by step, not slow – mean to me 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. 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. When new data come in, for example June inflation data, and when we see what happens with expectations, there’s a fair case to discuss whether 25 basis points in July are still appropriate. At the time of our last Governing Council meeting, 25 was the focus, but we should always keep the door open to discussion. 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. 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.

Q: What are the key factors that could justify bigger moves than the baseline of 25 and 50 basis points?

A: For example, if we see that expectations start crawling up, which we are observing indications of, or if we see that inflation is likely to persist for longer. Russian retaliation could lead to further negative supply side shocks in terms of both energy and food. This could keep inflation higher for longer than we expected. Also, the risk of nonlinearities has increased. This implies that frontloading interest rate increases would be reasonable. At the current moment, 25 in July and 50 in September are the minimum I would expect to see, but that’s only my own view and it has to be discussed at the level of the Council. 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.

Q: And in September it is hard to imagine that the inflation outlook improves in such a way that 50 basis points are no longer needed, no?

A: That would be a fantastic outcome, but it is unlikely. The war is likely to drag on, and energy and food prices are likely to remain subject to upward pressures. So, 25 and 50 are the baseline scenario, but with inflation risks on the upside, we may need to make a somewhat stronger decision.

Q: What can be said about interest rates beyond September?

A: Uncertainty is very elevated, so all 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. So, we will by all means be significantly above zero by the end of this year. That’s what I would expect.

Q: All else equal, an anti-fragmentation programme should logically encourage tighter policy, as it eliminates a potential obstacle in the form of an adverse market reaction. Is this the case?

A: Yes, it is. There are two elements. One is the monetary policy stance, and the other is monetary policy transmission. Problems with transmission shouldn’t be allowed to get in the way of our policy stance. 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. Still, one has to realise that monetary policy’s focus is price stability, and there are other policies that can influence fragmentation risk, namely fiscal and structural policies, completion of the banking union, common fiscal capacity, and so on. So, we will do what we can to maintain monetary policy transmission so that we can effectively pursue price stability across the entire area. But at the same time, monetary policy is not and should not be the only game in town.

Q: The BTPS-Bund spread is now below 200 basis points again - but was it the level that mattered, or the speed with which a relatively high level was reached?

A: Speed is important. The recent rise in spreads has been very fast-paced and, I would also argue, has run ahead of changes in fundamentals. It was too quick. There will be spreads of course, because economies are fundamentally not identical. The spreads also need to be tackled by structural policies and relevant measures. But the issue is how quickly they arise. 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.

Q: Should the anti-fragmentation programme be thought of primarily as a backstop?

A: It’s a backstop, in my view.

Q: What would trigger an intervention via the anti-fragmentation programme?

A: Of course, this will be related to the stress in the market and the risk of fragmentation, with relevant elements including the speed with which spreads are increasing, general market volatility, liquidity and so on. One needs calculations to establish some kind of benchmark, but fundamentally, the expert judgment of the Council will be of crucial importance, because the mix of elements can change and no two situations are the same.

Q: Is sterilisation in some form critical, so as not to affect the overall stance of monetary policy?

A: Yes. That is a possible element as well.