TRANSCRIPT: Interview with ECB Governing Council member Kazāks on 23 February 2024

28 February 2024

By David Barwick – GHENT, Belgium (Econostream) – Following is the full transcript of the interview conducted by Econostream on 23 February with Mārtiņš Kazāks, Governor of Latvijas Banka and member of the Governing Council of the European Central Bank:

Q: Governor, it's time for the Governing Council to discuss rate cuts, not in the sense of deciding whether or not to do a cut in March, which is still too early, but just to make sure that the Council converges towards what you eventually do and allow a smoother transition. Is that a bad idea?

A: I assure you that we take our mandate very, very seriously. What we've done over the hiking cycle very clearly shows that. And now we want to see that the inflation problem is overcome. This doesn't mean that we have to see inflation persistently come in at 2% and only then can we act, ex post. No; we closely consider the outlook and take into account all the lags. And we see very clearly that there are disinflationary processes at work and that monetary policy transmission is effective. We are in a relatively good situation. But can we already say that we are done? No, not yet. This is the message our recent meetings have conveyed. There are still various elements we have to look at, including the new forecasts for inflation and growth. And we need to ensure that inflation does not bounce back to levels that are not consistent with our target. Once we are sure of that, we will make the corresponding policy decisions. When exactly that will be depends on the data, and the data aren’t yet clear enough. For example, we see that the economy is relatively weak, but at the same time we see that the PMIs have recently improved. And of course, labour markets remain a key element to watch. So, we’re still looking at a whole spectrum of indicators. As for the discussion of rate cuts, the further we go, the more likely these will become. But again, the decisions are completely data-dependent.

Q: But does that mean that even a discussion about how to approach the easing is taboo?

A: No, it’s not a taboo. We are reasonable, responsible policymakers, and act as appropriate without declaring anything taboo. But every issue has its time for discussion, and this issue will be discussed when we see that the time has come, not before. All I’m saying is that if there are no major revisions to the inflation forecast and the economic outlook, then the deeper we go into the year, the closer we get to such a discussion. When exactly, we'll see. I think March is going to be important in terms of the updated forecast. I still think that there is not one single path to 2% inflation, and the path is going to be data-dependent. You could start earlier with smaller cuts or later with somewhat larger cuts. The cuts could be spaced more or less widely over time. All this is going to be part of the discussion when the time comes. Yes, there have been a couple of positive inflation surprises over the past month, which is good. But let's not get ahead of ourselves. The time will come, unless something about the economic and inflation outlook changes massively.

Q: So, depending on how everyone feels on the basis of the data, the March meeting in two weeks isn't necessarily premature as an occasion to discuss different possibilities.

A: I don’t want to discuss specific dates and get into the question of what’s premature and what isn’t. Decisions will be made when we see that they have become necessary based on data. What I can say now is so far, so good – as I said, we see that transmission is working, that monetary policy has done a good job, and that disinflationary processes are operating. But at the same time, there is a risk of moving too early, which we’ve seen in the 70s and 80s. Of course, the economies are structurally different then and now. But we still have very high geopolitical risks, and unlike the US, we are still an energy importer. And it has to be emphasised that it would be a very bad outcome if we moved too early and were then forced to hike interest rates again to tame resurgent inflation. That scenario should be avoided. But we will strive for the best outcome possible, and there is no point in keeping rates high any longer than necessary. And we’re not talking in terms of years. It’s a matter of meetings, which is a question of months or quarters. But let’s not get hung up on exactly when it will be. The mindset is clear, and unless some negative shock interferes, then rates will come down in a gradual way. No one is talking about hiking at the moment, and the economic situation wouldn’t justify it. But everything is data-dependent.

Q: And is there a need to be concerned about the danger that if the ECB doesn't signal more clearly that it's coming, then when it does come, the ECB will look scared of getting behind the curve?

A: “Behind the curve” is to some extent very subjective. My answer is that there are many ways to get to 2%, not one unique path that sets the standard for lateness. I have a hard time imagining us being massively late; we are reading the same data that the market is reading. What we know is that inflation has a trick up its sleeve, and that is stickiness, which we’ve seen in the past. We have to make sure that this trick is not played on us this time, and our data-driven approach to gaining the necessary confidence is very appropriate.

Q: You mentioned that there have been a couple of positive surprises over the past month. On balance, do you see recent data as bolstering the possibility of a rate cut in the near term? Or weakening the chances?

A: Let's see the updated forecasts and then discuss that.

Q: My understanding is that the cutoff date for the technical assumptions was a couple of days ago, meaning that February inflation won't be in them, and instead you'll have the January HICP, which was a little bit high. Does this affect the confidence that you have in the forecasts?

A: It would be very brave, perhaps also somewhat naïve, to assume that inflation would very smoothly, without any bumps, float down to precisely 2% and then hover there forever. The world is not as simple as that. There are going to be some ups and downs. And we communicated already with our January forecast that certain fiscal decisions were likely to lead to a jump in inflation. But that doesn’t mean a derailment of the disinflation process. No; it's just a bumpy phase in the context of an overall trajectory that is still pointing down. And that is why, unless there are negative shocks not currently in our baseline scenario, the next rate move will be down. When exactly and by how much, we'll see.

Q: Some of your colleagues prefer not to wait any longer, arguing that the trend is clear, we shouldn't choke off the economy and the September rate hike gives us a little leeway to act sooner. Do you find any of these arguments valid?

A: Are we choking the economy now? The economic weakness is partly cyclical and, of course, partly structural, with differences between national economies and a dichotomy between manufacturing and services. But it’s not like the PMIs show that anyone is falling off a cliff, and ultimately, no one is trying to choke anything. Our aim, and our mandate, is to get inflation under control. But the diversity of views is a good thing that enriches our discussions, so we do not shy away from it.

Q: It's argued that there's not much difference economically, whether you start in April or June…

A: Exactly.

Q: And does that imply that the risks are also not that big, whether you start in April or June?

A: We see that labour markets are still relatively strong. The economy is weak, but in general we're talking about a somewhat soft patch rather than a sharp and deep recession. By sticking to our price stability mandate, we provide a very good basis on which to build growth. If inflation resurges, then this will put the recovery of growth off to an unknown future. And given that our meetings are every six weeks, the time difference is not that big. So, when the data come in and we have better visibility, we will make decisions. Given transmission lags and so on, it doesn’t make sense to worry too much about the specific month. We’re not going to drag things out forever. But rushing in this case would be risky. So, let’s see the data. And I know people are discussing these issues and expressing different views, but that is just normal, because we’re near a turning point and turning points occur because things have changed. So that is all part of the deal. The different views limit the danger of groupthink and are beneficial for the quality of our decision-making.

Q: On the subject of whether you start later and move bigger, or start sooner and move smaller, last year you expressed a preference for the smaller move of 25bp. Wouldn't that imply moving sooner rather than later?

A: It's going to be state-dependent. At the end of the day, it is also very much a question of the cumulative size of the adjustment rather than the size of any individual step.

Q: Would it make sense to agree on precise preconditions? Can’t we say exactly what we want to see in the data?

A: There are so many moving parts. The same number may have a different meaning depending on the entire context. And I think some constructive ambiguity is necessary in an environment of such high uncertainty. That is also one of the reasons why providing very clear forward guidance is counterproductive. It just builds up expectations that might turn out false. But I think in terms of the reaction function, the Governing Council has been as clear as it can be.

Q: All that said, is there one particular type of information that you're waiting for more than other things?

A: We've been talking a lot about what happens with the labour market, because that's an unusual element of this hiking cycle, in the sense that despite the strong increase in interest rates, the economy has remained relatively robust and the labour market quite strong. There’s been a significant decrease in workers’ purchasing power, so it’s just natural that they would seek to regain that. But the question is whether this will spill over into second-round inflation pressures. We want to avoid that, because at the end of the day that will eat into real incomes even more. So, it's not only about the wage increases as such, but also about the potential for wage increases to spill over into general price rises. So, let's see what happens there. And of course, it’s also about what happens with corporate profit margins. To what extent does this translated into prices? If the profit margins can absorb a bigger share of the wage increases, then the risks for inflation are lower.

Q: And how confident are you that the new forecasts will tell more or less the same story as before?

A: The forecast is only a forecast. We're all economists, we know that uncertainty is high, we know that models are extremely helpful, but they are not telling the absolute truth. These are instruments to guide you. And that is how we've been using them. At the end of the day, there is a significant element of expert judgment - how do you feel about how it's going? Monetary policy has to be built on the baseline scenario. There are risk scenarios one has to be cautious about, but it's the baseline that is driving the key decisions.

Q: Does it remain the case that, subject to these risks, recovery in the course of this year can still be expected?

A: That is still the baseline, but we'll see in March how much it changes. It's very clear that our target is 2% in the medium term, but it's symmetric around 2%. Coming back to the way that we do the forecast, we include the market forecast for the rates. So, lower rates are already kind of baked into the forecast. If we very smoothly slow down to 2%, do we need to cut more than that? Why? We're just losing policy space, potentially just pushing up inflation.

Q: And over the course of the last month or so, do you feel more confident about where things are going or less?

A: I might describe the process using two words. One is confidence. We've seen that monetary policy is working, and our rate increases have been very helpful in stemming inflation persistence. So, we are confident that it is working and we have been making the appropriate decisions. In other words, we’ve done a good job so far. The other word is patience. Let's make sure that the problem is really resolved before we start cutting rates. The prospect of tightening again because of having started the process too early is a nasty one. Then the economy would really need to suffer. That is not our way, and that's why we have to be data-dependent. And patience does not mean waiting for years on end. It is months and quarters. This year, assuming nothing major unexpected happens, rates will start to come down.

Q: You may be a bit less confident that the timing will be in the first half of the year.

A: We are already two months into the year, so there is simply significantly less left of the first half of the year, and then there's the second half of the year. I repeat: let’s just see what the data tell us. There are some positive developments, which I already mentioned. But let’s not rush things too much. Let's be somewhat patient. And let’s remember that some of the data won’t be available in time for a particular meeting. Labour market data will only come later in the spring, for example. Of course, we're not looking at one single piece of information, but rather a set of indicators.

Q: On another topic, Madame Lagarde has indicated that the operating framework review would come to a conclusion soon. How important should this be for observers, since the ECB in any case is going to implement the monetary policy it feels is appropriate?

A: I won’t go into details, since it’s still a work in progress and announcements will be made when appropriate, but our operational framework is just a tool to implement our monetary policy. Our monetary policy stance is the key to ensure that inflation is symmetrically around 2% in the medium term. So, the framework is a set of tools with which to do our job and transmit our monetary policy. It’s a framework to implement monetary policy rather than a parameter that influences monetary policy.

Q: Back to the subject of easing monetary policy, how much of a lesson can be learned from the experience of the Federal Reserve?

A: We saw last year that financial markets somehow got excited very quickly. To some extent they have now understood that the inflation problem is going to take some time, given the risks of inflation persistence and the need to ensure that these risks do not materialise. In the euro area we are doing everything to ensure that we reach the target of 2% symmetrically in the medium term. And we should not push the notion of medium term into the future, because we have been above our target already for quite a while. We are making good progress. But let's not rush with rate cuts. Let's be a bit patient.

Q: Does patience imply any reluctance to react quickly to a change in the data?

A: If the data tell us so, we can move very quickly. But let’s wait for the data to tell it. At the moment, I don't see the data telling us to move. Last year, when the markets repriced so rapidly, it was inconsistent with our baseline outlook. It was only consistent with a situation where the economy sharply deteriorated. So, now we see that the inflation problem is in the process of being resolved. And the markets are taking a more cautious view. Let's be confident, have some patience and just see what the data tells us.