Exclusive: ECB’s Kazāks: Expect Continued Cuts of Same Magnitude, Unless Economy Does Worse Than Expected

7 October 2024

By David Barwick and Marta Vilar – RIGA (Econostream) – The European Central Bank will probably continue to take similarly-sized rate steps as long as the economic outlook does not worsen even further, ECB Governing Council member Mārtiņš Kazāks said Wednesday.

In an interview (transcript here) on the margins of the annual conference of Latvijas Banka, which he heads, Kazāks, who reviewed his comments on Sunday, strongly supported an October cut but declined to venture an explicit guess as to what would happen in December.

‘If we see in October that we can cut rates – and I think we can – then we will do so’, he said. ‘What we do in December, when we have a new set of projections extending into 2027, we'll decide then.’

Still, he did not seek to beat back market rate expectations, though he advocated caution.

‘I would be comfortable expecting continued cuts of the same magnitude, unless the economy is faring worse than expected’, he said.

The ECB was operating under the same high uncertainty as financial markets, and stood ready to adapt ‘as soon as we see that the scenario has shifted’, he said.

The economy remained ‘volatile, patchy and weak’, raising the spectre of ‘a tipping point … where shedding labour becomes the dominant trend’, he warned.

‘Since inflation is still a problem, we need to keep a degree of monetary policy restrictiveness, but worries about economic growth have become more obvious and the risks are increasingly balanced’, he said. ‘All this permits another rate cut in October.’

Such a rate cut would ‘provide a boost to the economy to reduce the risk of reaching a tipping point in the labour market’, he said.

Kazāks rejected the idea of waiting until December and then taking a larger step, saying that there was ‘no need to delay the decision in October.’

However, a relatively large step in October would also not be ideal, he said, calling a 25bp move ‘much more appropriate.’

The ECB should not encourage the sort of financial market exuberance seen a year ago, he argued.

‘Therefore, a measured pace of monetary policy adjustment is the best approach’, he said. ‘Of course, if the data worsen significantly and we see that we are moving to a different baseline scenario, then we will do what is necessary.’

It was ultimately up to the markets to define a potential move this month as hawkish or dovish, he said.

‘[T]he cut in October would be appropriate, in my view and based on the data that we've seen so far’, he said. ‘If the markets want to call it a hawkish cut, fine by me.’

The ECB needed to take into account the ‘growing risk’ of undershooting its target associated with approaching the objective from above, which was 'natural', he said. ‘We should not intentionally undershoot’, he said.