Exclusive: ECB’s Kazāks: ‘Quite Likely’ Keeping 2% Inflation Will Require ‘Some Further Cuts for Fine Tuning’

11 June 2025

By David Barwick – FRANKFURT (Econostream) – It is ‘quite likely’ that the European Central Bank will still need to put some finishing touches on its monetary policy stance and ease a bit further to maintain price stability, ECB Governing Council member Mārtiņš Kazāks said Friday.

In an interview with Econostream (transcript here), Kazāks, who heads Latvijas Banka, indicated that market expectations of around one more rate cut were reasonable, though he made clear that uncertainty was very high and that the timing of any moves depended very much on further developments.

‘We’ve done a lot in terms of rate cuts, and monetary policy will need to remain vigilant to ensure that inflation stays around 2%’, he said. ‘Will it require some further cuts for fine tuning? Quite likely.’

Market pricing calling for ‘one more cut or something like that’ was ‘not out of the realm of the baseline’, he continued. ‘But exactly how and when will very much depend on how the economy develops, especially at this time of very high uncertainty.’

the bulk of the ECB’s efforts to restore price stability was now past and monetary authorities had essentially ‘delivered’, but they still had to see to it that further shocks to the economy and the pass-through of previous measures did not threaten what had been achieved, he said.

the ECB was thus ‘not necessarily’ done cutting, but under current uncertainty would need to adhere to its data-dependent, meeting-by-meeting approach to policymaking, he said.

As for the possibility of a cut as early as the July Governing Council meeting, Kazāks was non-committal but unencouraging, observing that the ECB had ‘covered a lot of ground’, that the ‘series of uninterrupted rate cuts’ couldn’t continue indefinitely and that ‘the macroeconomic data flow is thinner in July’.

Still, in view of updated macroeconomic projections showing euro area inflation at a mere 1.6% next year, the ECB had to be ‘cautious’, he said.

Trade tensions could produce a deflationary outcome, but could also interfere with supply chains and wind up having an inflationary impact, he said.

‘So far, we do not see massive supply chain problems for Europe, and it seems that the deflationary effect could dominate, but the final outcome is still an open question’, he said.

Last Thursday’s 25bp rate cut should thus be seen in the context of the desire to ensure that inflation does not persist too low, he suggested.

‘We were already in the neighbourhood of 2% inflation and saw wage growth slowing’, he explained. ‘And on top of that we saw inflation going below 2%.’

Asked if the move had thus been an ‘insurance cut’, Kazāks replied that in his view, ‘it was to ensure that inflation in 2026 eventually turns the corner and starts returning towards 2%.’

‘It’s not the exact same as what we did in September 2023 of course, but you can view it similarly’, he added.

Looking ahead, the ECB would need to see to it that the deviation of inflation from the price stability objective ‘does not become too large or permanent’, he said. ‘We need to take care of those risks. The forecast so far shows that the dip is temporary.’

The decision last week had left the ECB in ‘broadly neutral’ territory, he said, declining to agree explicitly that policy was currently accommodative.

‘But under our data-dependent, meeting -by-meeting, fully flexible approach, I don’t exclude that we may need to become somewhat more supportive if the economy remains weak’, he said. ‘Because with inflation below 2% and a weak economy, we may at some point – not yet by any means - go into accommodative territory.’

In other comments, Kazāks insisted that the imminent departures of hawkish fellow Council members Klaas Knot of De Nederlandsche Bank and Robert Holzmann of the Austrian National Bank would not leave the ECB systematically more dovish. The Council would seek to deliver on its target in any case, and a range of perspectives was a strength, he said.

‘I have enjoyed working with Klaas and Robert, I have learned a lot from them and I am sad to see them leave’, he said. ‘But I have no doubt that even with experienced and skillful central bankers leaving, the Governing Council team will still be very strong.’