Exclusive: ECB’s Kazāks: If We Stay Within Baseline Scenario, Then Rate Scenario Is Incorporated in Forecasts

7 March 2025

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Mārtiņš Kazāks on Friday said that interest rate expectations incorporated in the ECB’s projections could still be realised if developments supported this.

In an interview with Econostream, Kazāks, who heads Latvijas Banka, stressed the high ‘uncertainty about the scenario that will play out'.

‘If we stay within the baseline scenario, then of course the rate scenario is incorporated in the forecasts’, he continued. ‘So, of course that can still materialise. The question is how the world will look in April, what will have changed, whether there will be a shift in the outlook that forces a shift in our baseline.’

The Council decision yesterday to cut interest rates while simultaneously making important adjustments to its language was ‘very well explained’ by ECB President Christine Lagarde, he said.

‘Disinflation is continuing with some deviations, but overall allowed us to cut to 2.5%’, he said.’ But uncertainty has risen to levels we haven’t seen in a very long time.’

In this context he cited tariffs and the possibility of a redirection to Europe of Chinese exports. ‘The other big thing is the fiscal situation’, he said, calling Europe’s readiness to spend money to meet challenges ‘very welcome.’

‘There are so many moving parts that we should stay true to our earlier modus operandi and be open-minded and decide from meeting to meeting based on data’, he said. ‘What will happen in April we will see, depending on how the economy develops.’

The probability that a scenario other than the main one would materialise was ‘high, in fact not that much different from the probability of our baseline’, he said. ‘So, we may shift from the baseline to other scenarios, which would call for another policy response. Pragmatism and agility will be necessary.’

Kazāks said he was ‘not happy about achieving 2% in early 2026, but this has happened very much due to energy prices, which have now come down again.’

‘One month here or there doesn’t matter very much’, he said. ‘Let’s be pragmatic; we see that disinflation has continued and that inflation expectations have remained anchored around 2%, which of course is very helpful for monetary policy to be effective.’

Pressed on the possibility of an April pause, Kazāks said, ‘If it’s necessary, we will pause. If it’s necessary, we will cut.’

‘We won’t know for sure until April’, he continued. ‘Yes, we’ve already come a long way, cutting by 150bp, and that obviously reduces restrictiveness. But there is a lot of uncertainty, so we can’t exclude anything.’

Uncertainty was so high that the April decision should not be prejudged, he insisted. As an example, he noted the expectation of the current projections that March would bring ‘quite a sizeable slowdown of services inflation’. However, this could only be verified in April, he said.

‘But the major source of uncertainty is clearly geopolitical’, he said. ‘Peace in Ukraine could have a very different impact, depending on the nature of the peace agreement, which could strongly boost or severely harm confidence and thus investment. It’s a shock that can go either way.’

The change in language on Thursday around the restrictiveness of rates recognised that the reduction in restrictiveness after 150bp of cuts had been ‘very sizeable, in its impact as well’, he said.

‘Removing the old wording was very appropriate, because it dated from the peak of restrictiveness’, he added. ‘If necessary, we will discuss the wording going forward, but this will depend on the environment.’

Asked when the ECB would stop pointing to past hikes as a source of continued tightening, Kazāks said that this ‘depends very much on which part of the economy you’re talking about’, with transmission much faster in manufacturing.

‘So, depending on the sector, it’s still continuing, even if it’s smaller’, he said. ‘There is still something in the pipeline. Mortgages and the repricing of loans clearly show this.’

As for the recent increase in European yields, ‘I see nothing dramatic here yet’, he said. 'Of course, we will look at how this impacts monetary policy transmission, which is one of our pillars. So, we will monitor it, but so far, I would even say that with all this uncertainty, volatility has been relatively low, although this may not continue.’

The ECB would in any case do whatever it took to achieve 2% inflation in the medium term, ‘and we are on track to do this either at the end of this year or, as the forecasts currently indicate, early next year’, he said.