Transcript: Interview with ECB Governing Council member Kazāks on 22 October 2025
22 October 2025
By David Barwick – FRANKFURT (Econostream) – Following is the full transcript of the interview conducted by Econostream on 22 October with Mārtiņš Kazāks, Governor of Latvijas Banka and member of the Governing Council of the European Central Bank:
Q: Governor, you recently spoke of the possible need to cut if inflation significantly undershoots the target for a long time. Is the impression correct that your attitude towards further easing may be warming a little?
A: No, that is not what I meant. A policy reaction under such circumstances is clearly spelled out in our strategy. Currently, based on available data and the outlook, 2% is the appropriate policy rate. Of course we see a certain deviation from our target, and if this turns out to be sustained and large, we will need to adjust. Risks to growth are still somewhat on the downside, and this, among other things, may influence the outlook.
Q: It sometimes seems that a December cut could come down to one tenth of a percentage point, referring to whether the 2028 inflation projection is 1.8% or 1.7%. Do you see it this way?
A: It’s important to remember that the impact of monetary policy is typically greatest in the first year. So, the outlook over the next year or two is most important, as that’s the time frame over which our actions largely unfold. And although our projections have gotten much more accurate, it’s still the case that a forecast three years out is more subject to vulnerabilities. This doesn’t mean we shouldn’t look at 2028; it is still very important. Another point is that even with more clarity regarding the trade situation, uncertainty remains very, very high. For example, if the euro strengthens a lot, this will feed into inflation dynamics. That is one risk we saw play out in the past and may see in the future. Also, Chinese exports, being reduced to the US, are finding their way into other markets, including Europe, and that could push inflation down. And then ETS2 is projected to add 0.3bp to 2027 inflation, but there are uncertainties here – for example, it could be postponed. Of course, there are also risks on the upside, such as geopolitical shocks or renewed supply chain constraints.
Q: And will the ECB have greater insight in December into the contribution - or lack thereof - of ETS2?
A: Information about this will arrive piecemeal on a country-by-country basis, making it hard to give a timeline. It’s a political decision that needs to be made. Until then, it’s part of the risk scenario.
Q: Could there be macroeconomic developments between now and December that don’t significantly affect the projections but still lead you to view another rate cut more favorably?
A: I would not single out any specific data point, given the interlinkages between relevant variables. One area of interest is, however, financial markets, which have been very bullish in terms of equity markets and gold prices. In some cases, valuations seem quite stretched. They cannot continue to grow at such a pace indefinitely. How a slowdown occurs is one of the elements we need to watch. Financial market performance has been very volatile. If this turns south, the impact on the economy could be visible. But these are risk elements.
Q: Would you speak of “irrational exuberance” with respect to financial markets?
A: Not necessarily overall, but perhaps in certain cases. Gravity still works and basic financial and economic relationships do matter, for example excessive levels of indebtedness are risky. And if one is open to vulnerabilities, then there can be an unpleasant correction. It won’t necessarily come to this, but caution is warranted.
Q: Would it make sense for the Governing Council next week to discuss the possibility of a December cut and to make clearer to observers what would justify one?
A: I think the market understands quite well the ECB’s reaction function as well as our meeting-by-meeting, data-dependent modus operandi. So, providing explicit forward guidance at times of high uncertainty with so many moving parts is counterproductive. Of course, in December we will have a much richer discussion in the context of the updated forecasts.
Q: When you refer to the “richer discussion,” do you mean a debate concerning competing alternatives, or just an exploration of the policy environment?
A: I mean that we will do a comprehensive assessment of all the information available to us, a substantial portion of which will be new and very important, namely the updated projections.
Q: You wouldn’t push back against current market expectations, which attach low probability to another cut this year?
A: With the data and current baseline outlook, for the October meeting 2% is appropriate. If something changes, we will discuss it. Most of the rate cuts of this easing cycle, given the baseline, have already been made. If any more would be coming, it would be small, raising the question: Why do it, what does it do for the economy? Small cuts are unlikely to have a sizeable impact on the economy, and past cuts are still feeding through. So, it would be more a signaling story. At the moment, given current forecasts, there is no need to change interest rates.
Q: Some of your colleagues argue that the terminal rate has been reached at 2%, so that the next move could logically be a hike as easily as a cut. How do you see this?
A: Given the very small adjustment expected by the market, given that we are near our target and the current inflation outlook doesn’t show a major sustained deviation, it may well be the case. If we see we need to hike, we will do so. If we see we need to cut, we will do so. There is currently no need to be biased to the upside or the downside. We are in a good place. We have delivered on our target.
Q: Would you worry that another cut could upset the equilibrium?
A: Inflation expectations are anchored, which is of immense value. The credibility of the ECB has allowed us to push inflation down with a relatively benign sacrifice ratio. So, we can afford to be in a monitoring mode – observing developments and ready to act if necessary. Our increased confidence that we’ve achieved our target means we don’t need to be jumpy. Minor adjustments are not as necessary when you have credibility in delivering on the target.