ECB’s Kazāks: Neutral Rate ‘Closer to 2% Than to 3%’, Should Not Rule Out a Larger Cut

13 December 2024

By Marta Vilar – MADRID (Econostream) – European Central Bank Governing Council member Mārtiņš Kazāks said on Friday that the neutral rate was closer to 2% than 3% and that he would be open to a larger rate cut if warranted.

In a blog post on the website of Latvijas Banka, which he heads, Kazāks said that ‘the current 3% [interest rate] is still holding back the economy’.

The ECB should keep cutting rates as long as disinflation continued, he said.

‘[T]he neutral rate r*, or the rate that neither holds back nor stimulates the economy, is, in my opinion, closer to 2% than to 3%’, he indicated. ‘So a significant reduction in rates is still necessary.’

The exact level of the neutral rate would depend on economic developments, he said.

‘Consequently, we will continue to see a gradual rise downwards’, he said.

Victory over inflation had not yet occurred but was ‘very close’, he said, and this would help the ECB keep lowering rates.

The ECB was right in taking a ‘step by step’ approach, but should not rule out a larger move, according to Kazāks.

‘Therefore, it is right to take it step by step. Of course, if necessary, the step can also be larger than 0.25%’, he said. ‘The current approach – data-based and analysis/decision-making from meeting to meeting – is well suited for this.’