Exclusive: ECB’s Kazāks: Shouldn’t Intentionally Undershoot or Overshoot Our Inflation Target

13 November 2024

By David Barwick and Marta Vilar – FRANKFURT (Econostream) – The European Central Bank should not deliberately set out to undershoot or overshoot its 2% inflation target, according to ECB Governing Council member Mārtiņš Kazāks.

In a recent interview with Econostream, Kazāks, who heads Latvijas Banka, objected to the view expressed by some that - given how long inflation had been above the ECB’s definition of price stability - undershooting 2% for a certain period would now be appropriate.

Any attempt to achieve an average of 2% inflation was tantamount to price level targeting and would imply that the ECB had far more control over actual outcomes than it really did, he argued. Ultimately, such an endeavour ‘would just put at risk our credibility’, he said.

The ECB’s best bet was therefore to aim strictly for 2% at all times, he said. In doing so, it should continue to follow its current cautious approach, he said.

That meant not being hasty in reacting to perceived scenarios, but rather proceeding with a ‘measured pace, step by step’, avoiding ‘sharp moves’ but retaining ‘full optionality and flexibility’, he said.

This was all the more important under the current circumstances, with political decisions – including in particular from the US – very uncertain and possibly more apt than usual to influence the environment of the ECB’s policymaking, he said.

There was a heightened danger of the ECB once again being regarded as ‘the only game in town’, which should be strongly resisted, he said.

The downward direction of euro area interest rates was clear in the context of ‘gradually’ subsiding inflation, and there was no reason to rush with policy, he said. Rates were still clearly restrictive, though less so than previously, he said.

In Kazāks’ view, the analysis underlying the Governing Council’s monetary policy decision next month should more heavily weight what it projected would happen next year rather than in 2027, for which an initial set of projections would be unveiled.

It made little sense to overreact to developments as far off as 2027 and in doing so to potentially destabilise the situation in the coming year, he explained. The ECB had plenty of time to react to whatever it envisioned for 2027, he said.

Kazāks pronounced the euro area economy to be ‘somewhat better’ than it had been recently and said that 3Q growth data made him for the moment ‘less worried’ than he had been about a downturn of the region’s labour market.

Overall, economic activity was ‘still within the confines of the baseline scenario’ and thus too weak, he said, even if a ‘gradual recovery’ should still be coming, he said. A sorely needed improvement in productivity had yet to occur, he said.

In other comments, Kazāks underscored the importance of central bank independence for monetary authorities’ ability to ensure price stability. This also meant keeping central banks separate from politics, he said.