Transcript: Interview with ECB Governing Council member Kazāks on 27 November 2025

2 December 2025

By David Barwick – FRANKFURT (Econostream) – Following is the full transcript of the interview conducted by Econostream on 27 November 2025 with Mārtiņš Kazāks, Governor of Latvijas Banka and member of the Governing Council of the European Central Bank:

Q: Governor, the field of candidates for a seat on the ECB Executive Board is getting crowded. How likely is it that you'll be moving to Frankfurt?

A: I would, of course, regard it as a great honor. I’m open to the possibility and would do my very best if chosen. I have the full backing of the Prime Minister and Minister of Finance, and I hope the coalition will add its support. But ultimately, it is for politicians to decide.

Q: Turning to monetary policy, how do you see markets’ understanding of what “a good place” is?

A: I think markets’ understanding of our reaction function is good, and pricing has been in line with our decisions. Put another way, the Governing Council and the markets look at similar datasets and come to roughly similar conclusions. So, markets understand how we read and react to the data. This is part of being in a good place.

Q: Is it fair to say that we're in for a long hold unless there's a substantial change in conditions?

A: Our meeting-by-meeting, data-driven modus operandi is very clear, but uncertainty will remain high, with constant potential for new shocks. So, there is no unique rate path, because we don't know how the economy will evolve. Our baseline is the most likely scenario, but the probability of alternative scenarios is almost as high. Explicit forward guidance is therefore not appropriate, and part of this is being very careful with predictions like the one you’re asking for. The correct strategy is to continue meeting by meeting, which will remain our approach going forward.

Q: Would you nevertheless be surprised if at the end of next year rates had not changed?

A: We'll see what happens with the economy. Soon we will have a first projection for 2028. That is a very important piece of information to digest, analyze and discuss. But a projection three years out under current uncertainty is subject to very wide confidence intervals. So, I would not consider the 2028 forecast a reason in itself for us to act or not act. I would pay much more attention to 2026 and 2027 to shape monetary policy decisions. Our forecasts have improved, and one year ahead is much more precise than three years. Also, monetary policy is more effective over a horizon of 12 to 24 months. So, aiming at an uncertain target three years in the future would not make sense. 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. Yet another element is that our reaction function is not linked only to headline inflation and its outlook. We also look at underlying inflation, and core is much more stable than headline. All in all, given the credibility that we have, we can be much more considered and less jumpy in terms of our decisions.

Q: And does this imply that a cut and a hike are equally likely to be the next move?

A: It depends on where the data take us. I would not 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. 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. 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. But this by no means says that the next move will be a cut. We simply don't know.

Q: If, even without a shock, the projections show inflation below target across several years, how big would the deviation have to be to require discussing the possibility of a policy response?

A: I think we will always discuss everything: all the data, the forecasts, whether alternative scenarios are becoming more visible compared to the baseline, and so on. That is just our modus operandi. 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.

Q: How do you view the current risks to inflation?

A: The EU has decided against retaliating on tariffs, somewhat reducing upside risks. I think there's better awareness of downside risks, but this does not mean that there are not still upside risks. I would say known unknowns – most notably ETS 2, Chinese trade flows, and possible further strengthening of the euro – are concentrated on the downside. But given the geopolitical environment, there are certainly unknown unknowns that might push inflation higher. 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.

Q: You would clearly not wish to call 2% the terminal rate at this point. Would you be willing to call it the conditional terminal rate - conditional on nothing else happening to require a change?

A: We are in a good place. Given all the information that I currently have on where inflation is and how it's likely to develop going forward, I think 2% is appropriate for the situation. What happens further? We'll see.

Q: With regard to ETS 2, should monetary policy be more concerned with the timing of its effect, or just the total impact?

A: Both elements are important, because the speed of adjustment also matters. It’s like with exchange rates: it's not only the level that matters, but the speed with which it is reached. So, this is one of the variables that we need to continue to monitor, because its estimated impact on inflation is of significant magnitude. 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.

Q: How preoccupied are you at the moment with financial stability concerns?

A: There are many aspects of this issue, and it is something we have to follow closely. This relates to the increasing role of non-banks in financing our economies, to the linkages with the traditional financial sector, and of course to asset valuations. If something “breaks,” it will ultimately affect overall economic growth and broad financial stability.

Q: Could such risks become kind of a binding constraint for policy in the next year or so, forcing you to do something or preventing you from doing something you otherwise would do?

A: Our target is very clear: 2% inflation. Of course, we need financial stability for monetary policy to be effective and operational, so financial stability is important. But we do not allow fiscal dominance or financial markets to drive our decisions.

Q: And do you think that markets fully internalize the vulnerabilities that the ECB’s latest Financial Stability Review highlighted?

A: Markets never fully internalize such risks, and their reactions are often exaggerated. The key point, however, is that the European financial sector is strong: banks are well-capitalized and overall resilience is good. That does not mean we are bulletproof or that nothing bad can happen. Shocks may occur, spillovers may arise, and we must closely monitor transmission channels as well as our own vulnerabilities. This is precisely why we keep financial stability under close observation — because monetary policy cannot function properly if the financial system is in flux.