Transcript: Interview with ECB Governing Council member Kazāks on 06 June 2025
11 June 2025
By David Barwick – FRANKFURT (Econostream) – Following is the full transcript of the interview conducted by Econostream on 06 June with Mārtiņš Kazāks, Governor of Latvijas Banka and member of the Governing Council of the European Central Bank:
Q: Governor, the ECB is almost done. Why not completely done?
A: If I look back at the high inflation episode and consider where we are now, I would say that we’ve delivered: we’re at 2% headline inflation. But our job is never done, because we must now ensure that we remain at 2% symmetric in the medium term despite shocks to the economy and things working through the transmission mechanism. So, we still have work ahead of us. But we are at target. Are we done cutting rates? Not necessarily. We have to see. Uncertainty is very high, meaning we can’t give forward guidance. We must decide on a data-dependent, meeting-by-meeting basis.
Q: What does this mean for July?
A: For now, I would answer this by saying that we’ve covered a lot of ground in terms of reducing interest rates. It was always so that the series of uninterrupted rate cuts would come to an end at some point, and we would pause. If we remain within the baseline scenario, then further policy moves are going to be fine-tuning. But uncertainty is very high, meaning there are multiple scenarios with a high probability, so we could suddenly find ourselves in another scenario. So, what we’ll do in July we will see in July, and clear forward guidance would be counterproductive. That said, the macroeconomic data flow is thinner in July, though there can always be political developments.
Q: The bias is to wait in July.
A: It’s important to note that we have done a lot and that a significant part of our measures is still feeding through the pipeline. But the projections are key, and they show inflation continuing to fall.
Q: What is most likely to lead you to believe at either of the next couple of Council meetings that it’s time to do some fine-tuning?
A: We will be guided by our responsibility to ensure 2% medium-term inflation symmetrically. And if we see that monetary policy needs to move one way or another to ensure that inflation stays around 2%, then we will consider the appropriate reaction.
Q: And when you say “one way or another”, are you deliberately signalling the possibility that fine tuning could be in either direction?
A: No. I'm just saying that we will decide on a data-dependent, meeting-by-meeting basis with all the flexibility that is necessary to deliver 2% symmetrically in the medium term.
Q: How concerned are you that the euro could strengthen so much more that you need to react?
A: The exchange rate is of course an important part of the story, even if we do not target a specific level. With some delay, changes in the exchange rate are transmitted to inflation dynamics. So, exchange rate developments have implications for monetary policy, and that’s a reason for uncertainty. Energy prices and the exchange rate are two major elements that recently weigh down on inflation.
Q: The updated projections show significant undershooting of the target next year. How worried do we have to be about getting below 2% and not coming back up the way the ECB currently expects?
A: That is one issue that we have to be cautious about and follow developments. There is a lot of uncertainty in this regard. Trade tensions can lead to price pressures in either direction. They can be deflationary, but if they lead to supply chain problems, then they can also cause inflation. 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.
Q: But isn’t there an argument here for a pre-emptive rate cut, maybe two, so as to get rates below 2% and ensure that inflation comes back up? You can always hike again in six or eight months.
A: Maybe, though there is the issue of how much volatility you want to introduce in the rate path. But I would view yesterday’s cut in precisely this context. We were already in the neighbourhood of 2% inflation and saw wage growth slowing. And on top of that we saw inflation going below 2%. So, I would view yesterday’s rate cut as part of the storyline that you just highlighted.
Q: In a way, you are saying that it was an insurance cut.
A: In my view, it was to ensure that inflation in 2026 eventually turns the corner and starts returning towards 2%. In effect, this is what you were suggesting. It’s not the exact same as what we did in September 2023 of course, but you can view it similarly.
Q: Would you say at this point that we're in broadly neutral territory?
A: Yes.
Q: But not slightly accommodative?
A: Broadly neutral. 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. Because with inflation below 2% and a weak economy, we may at some point – not yet by any means- go into accommodative territory. When you come close to a turning point, the sensitivity to communication signalling is higher, because views are likely to be less aligned. When inflation is high, then everyone knows that you need to hike rates. But this period of fine-tuning we’re in is going to proceed at a slower pace, and one needs to be somewhat more patient.
Q: And when you say that you can't exclude that we may need to become somewhat more supportive if the economy remains weak, we're just talking about one or two more cuts, right?
A: This is the issue of scenarios, meaning the question is which macro scenario we find ourselves in. If we are within the baseline scenario, then we are relatively close to where we should be. And then the question is about inflation in 2026 and whether the forecast holds. Uncertainty is high and the probability of alternative scenarios is relatively high.
Q: And looking at it the other way, would it be surprising to you if we didn't cut at least once more?
A: We’ll see. We will act as necessary to deliver inflation at 2% medium-term symmetric. But we clearly have done a lot, so let's move further on at a measured pace, if necessary. The uninterrupted stream of rate cuts is not necessary anymore if we stay within the baseline.
Q: It seems fair to say that your thinking has entered a new phase.
A: I still agree with the majority of my colleagues. And I supported yesterday's decision. It was good and appropriate. What we'll do in July, we'll see. We are very aligned so far. We've done most of the rate cuts of the cycle, and if there are any further cuts, they are fine-tuning, if we remain within the baseline scenario. We’re at 2% now and although there will be a dip, we see in the staff forecast that inflation in 2026 starts to return back to 2%. Going forward, one needs to be cautious of inflationary dynamics and of what is happening with the economy to ensure that this deviation from the target does not become too large or permanent. We need to take care of those risks. The forecast so far shows that the dip is temporary.
Q: I noticed that you and your colleagues tend to say that we have done “most” of what we need to do, instead of saying “most or all”. So, there is still an easing bias.
A: Let's keep an open mind. The market is currently pricing one more cut, and that is possibly within the realm of the baseline scenario. But of course, specific decisions will be made when we need to make those decisions.
Q: A few months ago, markets would have thought that a pause meant a higher chance of a 50bp cut at the next meeting. But a pause in July now does not mean that in September, the ECB is more likely to do 50bp.
A: Right.
Q: You mentioned the need to ensure that economic weakness does not lead to persistent undershooting, and the September projections could bring a downward revision to growth. It sounds like it would be surprising if the ECB didn’t need to do more.
A: Yes, growth is weak. The first quarter was strong, but part of that was frontloading due to possible tariffs. So, the first half is likely to be relatively good. The third quarter however is likely to be a victim of this, but we should still see growth in the neighbourhood of 1% for the year overall, followed by gradual strengthening in 2026 and 2027. So, it’s true that the economy is not very strong, but there is growth. At the same time, there are downside risks to growth, mainly driven by geopolitics. One good thing is that despite all the volatility, a US recession seems less likely. But uncertainty remains very high.
Q: Back when the ECB was hiking, we always said that we would only be able to identify the end in the rearview mirror. Is it similar now in the sense that we will only know some time after the fact that the easing cycle is done?
A: Yes, that is clear. This is not a static world, there are many moving parts. 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%. Will it require some further cuts for fine tuning? Quite likely. As I said, what the market was pricing - one more cut or something like that - is not out of the realm of the baseline. But exactly how and when will very much depend on how the economy develops, especially at this time of very high uncertainty. The biggest chunk has already been dealt with.
Q: On a different topic, could the Governing Council become structurally more dovish soon, with Governor Knot and Governor Holzmann, two relatively hawkish policymakers, both leaving?
A: I would not speculate on this happening. The Governing Council is not inherently hawkish or dovish. The Governing Council aims to deliver on its 2% target, whether views differ or not. Differing perspectives are a strength of the Governing Council, and President Lagarde has been very skilful in fostering discussions and leading the Council to good results. And we can see that we have delivered in terms of inflation, that the credibility of the ECB is high, and that trust in the euro is very high. So, we have done a good job so far. I have enjoyed working with Klaas and Robert, I have learned a lot from them and I am sad to see them leave. But I have no doubt that even with experienced and skillful central bankers leaving, the Governing Council team will still be very strong. And we will have new colleagues joining us who will contribute immensely as well.