ECB Insight: Kazāks Comments Show Dovish Shift in Thinking

6 December 2023

By David Barwick – FRANKFURT (Econostream) – Barring a dramatic event, one should not expect rhetorical about-faces from a central banker with well-known views; European Central Bank Executive Board member Isabel Schnabel came about as close to that on Tuesday as it gets.


Her colleague, Governing Council member Mārtiņš Kazāks, who heads Latvijas Banka, seems to prefer a more modest revamp of previously held positions, based at least on the presentation made available for an event taking place Wednesday behind closed doors.


Even so, a certain dovish shift is not hard to tease out.


Cutting rates would take a ‘very dramatic turnaround’ of the economy, he said back on 31 October, when he also said that cutting interest rates in the first half of next year ‘would be, in my view, inconsistent with the current macro outlook — but uncertainty, of course, remains high.’


In an Econostream interview on 8 November as well, he clung to the perspective favoured by the Governing Council’s most hawkish members. ‘I don’t think anyone can say all the rate increases have happened, because we are reacting to incoming data, so the door for rate increases should not be shut’, he said at the time.


To be sure, today as well, he reiterated the view that ‘discussion on rate cuts is premature’, but he followed up with a more nuanced comment that explicitly allowed for the possibility of policy easing in the foreseeable future, conditional on developments.


‘Given current economic outlook and medium term-projection baseline, no need for rate cuts in 1H 2024, but, if the outlook changes, and the balance of risks for price stability shifts, also our decisions on rates might change’, he said, according to the presentation.


Absent was any speculation about the need for further hiking; rather, he said, rates were at levels that were ‘contributing forcefully´ to a return to price stability, and it was appropriate now to emphasise ‘the speed and extent of monetary tightening’ as previous tightening feeds through.


He was also more dovish on the economy. After characterising growth on 8 November as ‘a tad weaker than expected’, he was less begrudging today, calling the short-term outlook for activity simply ‘subdued and weak’.


While Kazāks had previously already acknowledged the decline in inflation, the emphasis a month ago was on the contribution of base effects to the retreat of the headline rate and on the persistence of high core readings.


On Wednesday, he spoke for the first time of a trend, which is exactly what the moderation of inflation has to be for talk of policy easing to gain traction. ‘In terms of momentum, there has been a nice and consistent downward trend since spring’, he said.


Finally, gone was the no-big-hurry approach to QT he’d endorsed on 8 November, when he noted that ECB President Christine Lagarde had promised a decision on the central bank’s operational framework next spring, given which ‘there is still some time to discuss the issue of QT and the PEPP’, he said. ‘[W]e’ll get to the discussion of the PEPP, but not yet.’


Today, in marked contrast, there was ‘no reason to linger on’ when it came to reducing the size of the Eurosystem’s balance sheet, he said, in what sounded almost like a pointed rebuke, given that Lagarde until just days ago had been dragging her feet on the matter.


Kazāks adjustment of his positions is incremental, more so than the pivot performed by Schnabel yesterday. It is certainly not more than one could argue was appropriate, given the recent evolution of euro area economic activity and inflation. But if Kazāks, who has been relatively tenaciously hawkish, is softening, then we think other holdouts cannot be too far behind.