Exclusive: ECB’s Kazāks: Negative Shock Would Make Cut Likelier Than Equal Positive Shock Would Make Hike

2 December 2025

By David Barwick – FRANKFURT (Econostream) – The likelihood that the European Central Bank would cut if confronted with a negative inflation shock is greater than the probability of it hiking in response to a positive shock of equal magnitude, according to ECB Governing Council member Mārtiņš Kazāks.

In an interview with Econostream on Thursday (transcript here), Kazāks, who heads Latvijas Banka, made clear that this did not mean that the next move would be a cut and indeed professed deep uncertainty as to the timing and direction of the next change to official interest rates.

Everything “depends on where the data take us,” he said, declining to speculate.

“More generally, though, the current outlook sees inflation below 2% early next year, and if there were a negative shock on top of this, then the outcome would be a greater deviation from target to the downside that could argue for a policy reaction,” he said.

“On the other hand, a shock of similar magnitude to the upside could put inflation closer to 2%, leading to a less immediate need to move,” he continued. “In purely theoretical terms, if two shocks were equal in size but opposite in direction, the negative one would make a cut more likely than the positive one would make a hike, because the downside deviation from target is larger than the upside deviation.”

Asked for his assessment of markets’ interpretation of the ECB’s “good place” mantra, Kazāks said that they understood the Council’s reaction function well and had correctly anticipated recent policy decisions.

“Put another way, the Governing Council and the markets look at similar datasets and come to roughly similar conclusions,” he said. “So, markets understand how we read and react to the data. This is part of being in a good place.”

The ECB would continue to set policy meeting by meeting in this highly uncertain environment, he said. The updated macroeconomic projections for 2026 and 2027 would deserve “much more attention” for policymaking purposes than December’s initial look at 2028, he said.

“[A]iming at an uncertain target three years in the future would not make sense,” he said. “Of course, we need to consider inflation expectations, but I see no reason to think expectations are de-anchoring. They remain firmly anchored around 2%, giving us leeway to see where exactly the economy goes and then act if necessary.”

The Governing Council might discuss the option of a cut this month, but this had to be seen in the context of its “modus operandi” involving thorough consideration of “everything,” he said.

“The only thing I can very clearly say is that currently available data do not, in my view, warrant a strong discussion on changing the policy rates,” he said. The current 2% was “appropriate for the situation.”

Upside risks to inflation had been limited somewhat by the EU’s avoidance of tariff retaliation, he said. Still, while downside inflation risks might get more attention, there remained risks to the upside, he said.

In particular, unknown unknowns of a geopolitical nature “might push inflation higher,” he cautioned. “And these aren’t necessarily smaller risks, even if we have not identified them as clearly as we have the factors that might push inflation lower.”

ETS 2 was important with respect to both timing and total impact, he said. “It’s like with exchange rates: it's not only the level that matters, but the speed with which it is reached,” he said.

The ECB would need to pay attention to ETS 2-related developments, given that “its estimated impact on inflation is of significant magnitude,” he said. “Our September projections – as well as our Spring ones – estimated the impact on 2027 inflation at 0.3 percentage point, so it’s not a small element.”