ECB’s Kazāks: Further Rate Hikes Needed Under Baseline Scenario

20 March 2023

By David Barwick – FRANKFURT (Econostream) – The European Central Bank will have to continue raising interest rates, assuming market conditions do not interfere, Governing Council member Mārtiņš Kazāks said Monday.

In an interview with Bloomberg, Kazāks, who heads Latvijas Banka, said with reference to last Thursday's Council meeting, ‘Inflation is still very high — rates, in my view, needed to go up. And if the baseline scenario holds and market volatility calms down and does not derail the scenario, then with the current macro outlook and the outlook for inflation, more interest-rate increases will be necessary.’

On the other hand, if banks were to grow more hesitant about lending, he said, ‘then the economy is going to be weaker and that of course may lead to a situation where the rates may not need to go up that much.’

‘As long as we are within the baseline scenario, staying the course is important because at the end of the day high inflation is very damaging to the economy and especially to those with lower incomes’, he was quoted as saying. ‘So we need to resolve this in a reasonable timespan without delaying too much.’

According to the news agency, Kazāks conceded that ‘we’re getting closer to the situation where we very cautiously have to address both risks — of doing too much and doing too little — in terms of implications for the economy.’

Precise guidance extending several meetings ahead was now ‘not only inappropriate, but also counterproductive’, he said. ‘But of course, forward guidance is as good an instrument as any, and if we will see it necessary and the environment is going to be appropriate, we may use it again.’

The course charted by the ECB could include ‘some trial and error’, he said, but ‘the consequences of raising by 25bp too much are easier to repair than consequences of raising by 25bp too little. You can always cut rates if necessary, but if you want to cover for the earlier shortfall, it is very likely that you would need to raise by much more than 25.’