ECB’s Kazāks: ‘Quite Likely’ That Inflation Will Be Back at 2% Earlier Than We’d Expected

24 October 2024

By David Barwick – WASHINGTON (Econostream) – European Central Bank Governing Council member Mārtiņš Kazāks on Thursday said that it was probable that euro area inflation would be at the ECB’s target before the end of 2025 envisioned by the current macroeconomic projections.

During a panel discussion at a conference of the Reinventing Bretton Woods Committee, Kazāks, who heads Latvijas Banka, said, ‘The storyline could be that in December we look at the updated forecast to see when do we return to 2%. Is that the end of next year or somewhat earlier?’

It was ‘quite likely’ that the restoration of price stability would be seen to occur earlier than previously expected due to economic weakness, he said.

As for interest rates, he said. ‘We are in restrictive territory and of course we should not remain in restrictive territory when we arrive at 2% in a sustainable way.’

Given still ‘very high’ uncertainty, the ECB should stick to its current meeting-by-meeting, data-dependent approach to policymaking, he said. This meant that ‘we will see in December what we will do in December’, he said.

‘But of course the direction for the rates remains downwards’, he added.

Whether economic weakness would make lowering borrowing costs to below neutral would need to be seen, but rates would in any case probably not have to be taken ‘significantly’ below neutral, he said.

‘We are not in that kind of scenario yet’, he said.

Kazāks suggested that the ‘last mile’ inflation discussion could be replaced by one about the ‘last kilometer, which is somewhat shorter.’

A relatively large rate move would become less probable as rates approached the neutral level, he said. 

'We don’t want to make a mistake and be forced to reverse the course', he said. 'That again speaks, at least for me, in favor of a gradual, step-by-step approach.'

Were developments to 'turn sour', however, he did not exclude any policy response.

A soft landing for the area’s economy was still the baseline, but a ‘major problem’ was the persistence of feeble growth, due chiefly to structural factors, he said.

However, household confidence was slowly improving, ‘and that might be a signal that the savings rate is finding its peak and not going further’, he said. ‘That might be an early indication that consumption wlll start to grow.’

Still, risks to growth were to the downside on balance, he said, and there was the danger of labour markets reaching a ‘tipping point’.

Such a point was ‘not there at the moment yet’, but rather was a risk for next year, he said. ‘But I don’t think we can ignore that.’