ECB’s Kazāks: Should and Will Continue to Hike Rates to Keep Inflation from Becoming Entrenched
4 August 2022
By David Barwick – FRANKFURT (Econostream) – The European Central Bank must and will hike interest rates further to keep elevated inflation from becoming entrenched, according to ECB Governing Council member Mārtiņš Kazāks late Wednesday.
In an opinion piece for Latvian news portal Delfi, Kazāks, who is Governor of Latvijas Banka, wrote, ‘The Governing Council of the ECB should continue to raise rates in order to prevent high inflation from taking root and for it to subside quickly when global energy and food prices normalise.’
In the context of Latvia, Kazāks said that given the external nature of current inflationary pressures and the consequent impossibility of directly affecting these, the task was ‘to prevent inflation from taking root and creating a price-wage spiral.’
The situation was much the same in other countries of the euro area, he noted, and inflation is high where the euro is not the currency. ‘High inflation is currently a global problem’, he said.
Although central bankers have no influence on the proximate causes of inflation, they do have the wherewithal to ensure that the initial surge of prices does not entrench, he said. This is the motivation for the ECB’s normalisation of policy, he said.
‘The era of negative rates is over’, he said. ‘In order to bring inflation back to its target of 2% in the medium term in the euro area as a whole, rates will continue to be raised.’
Although higher borrowing costs add to the woes of consumers already facing higher prices for food and energy, ‘unfortunately, the increase in rates is a necessary "medicine" so that a one-time price increase does not turn into an uncontrolled and hard-to-stop price-wage spiral’, he said.
‘Although the main drivers of inflation remain energy and food, the rise in prices has become much broader’, he said. ‘Prices are rising for a wide range of goods and services, which increases the risk of inflation becoming entrenched.’
‘Together with our colleagues in the ECB Council, when deciding on the next steps, we will act prudently, decisively and flexibly at the same time, creating appropriate monetary policy conditions for the economy of the euro area, and therefore also of Latvia’, he said.
Kazāks urged continued support for Ukraine.
‘It is important that Ukraine wins this war and Russia's imperial ambitions are crushed’, he wrote. ‘Also because, otherwise, we will live like a "powder keg" in inflationary dynamics for many years to come.’