By David Barwick – FRANKFURT (Econostream) – Following is the full transcript of the interview conducted by Econostream on 24 March 2026 with Mārtiņš Kazāks, Governor of Latvijas Banka and member of the Governing Council of the European Central Bank:

Q: Governor, would you favor an insurance hike?
A: I would not describe it as an insurance hike. If I saw signs that inflation was becoming entrenched and spreading across sectors, with meaningful second-round effects, then an early move would be warranted to contain it before those dynamics intensified.

The challenge is that some of the indicators we need will adjust only gradually, which is why survey evidence and high-frequency data matter. I would pay close attention to corporate pricing behavior: if firms begin repricing aggressively, the risk of nonlinear effects rises. Inflation expectations are also critical. If the tails of the distribution start to fatten, that is something we would need to address. Households and firms have recent experience of high inflation and now know how to react, which again raises the risk of nonlinearities.

Fiscal policy is another crucial element. Any support measures would have to be tightly targeted and tailored to specific needs. Broad-based support is out of the question; that would simply validate generalized price increases. In the case of petrol and natural gas, fiscal authorities should not try to preserve pre-crisis price levels. There is neither the fiscal space nor the economic logic for that, because it would impede necessary adjustment. What they can do is limit extreme price spikes. Petrol may be one area where some support is justified.

So my position is that we should remain patient, but be ready to act when necessary. At the ECB, that means every meeting is live and forward guidance is not appropriate.

Q: Has the adverse scenario already materialized?
A: We have our baseline and then the two alternative scenarios we analyzed. At present, oil prices are somewhat above the technical assumptions embedded in the baseline. But uncertainty remains exceptionally high: oil was at USD 93 yesterday and USD 120 last week. The situation is still highly fluid, and we do not yet know where prices will settle.

If they stabilize around current levels, they would still be somewhat above the baseline, which reflects market pricing at the time of the exercise. That gives you some sense of the kind of policy response that could become relevant. As for the alternative scenarios, we should not jump to the conclusion that they have already materialized. In the severe scenario, if the assumed increases in oil and gas prices were to occur and the historical elasticities still held—which is itself an open question—the macroeconomic outcome would broadly resemble what we described, absent any further monetary policy response. In that sense, it is better understood as a sensitivity analysis. It does not incorporate a policy reaction in addition to what is baked into the baseline.

Q: Wouldn’t it be appropriate to guide markets fairly clearly toward a decision to hike?
A: In one sense, yes, but I would be very cautious about establishing any new form of forward guidance. When oil is at USD 120, that may point to one type of decision; at USD 93, it may point to another. What matters is not to pre-announce rate moves, but to communicate our reaction function clearly.

That is why I do not talk about hikes as such; I talk about the conditions under which we would react. If you try to lay out a path for policy rates, you risk locking yourself into mistakes. Giving markets a clear understanding of the reaction function is better policy. And as I said, my instinct would be to move sooner rather than wait too long.

Q: Governing Council members often note that one hike alone has limited impact. Would you therefore assume that, if the ECB hikes, it would probably do so more than once?
A: That would move us back into the realm of forward guidance, so I would be careful. But it is true that a single isolated hike would be somewhat unusual. Ultimately, it depends on the size and persistence of the shock. If the objective can be achieved with less tightening, then there is no reason to do more than necessary. Still, if one hike alone were enough, that would amount to a lucky coincidence.

Q: How do you regard current market expectations?
A: It depends entirely on which scenario ultimately plays out. Market expectations may be reasonable, but at this stage we simply do not know. Forecasting with confidence that far ahead is not possible under current conditions.

Q: Does past experience suggest that, if the ECB were to hike, your preference for starting early would also argue for starting with a relatively large step?
A: Let me first be clear that we would act only if it became necessary. My point is simply that, given our experience over the past few years, we need to remain alert to the possibility of nonlinearities in pricing and expectations. That is not an argument for being deliberately early or late; it is an argument for caution in the face of those risks.

At the same time, there are important differences relative to 2022. One is the scale of the shock. Oil prices at their peaks are now close to the levels we saw then, but while gas prices have doubled, they remain far below the extremes of 2022. So we should not overstate the comparison. Monetary policy is also in a very different place: today it is neutral, whereas then it was still highly accommodative. And our credibility is now a significant asset. We are among the few major central banks to have delivered on our mandate, which gives us a relatively comfortable position from which to move in either direction, and at whatever speed proves necessary.

We should also bear in mind that there are disinflationary forces in the background, including improvements in supply chains and the risk of financial market stress spilling into recession. In my view, the recession risk is not trivial, so that side of the equation also requires caution.

Q: If the decision were today, would you want to hike?
A: The decision we took last week still stands today.

Q: How high can 2026 inflation go without requiring policy action, as long as the projections still show a timely return to around 2%?
A: You have to look at a broad set of variables, including possible second-round effects. If core inflation remains stable while headline inflation rises because of energy, that is one type of situation. If core inflation also starts to move up, then it becomes much harder to look through the shock.

We are still in the early phase. What we can already say with confidence is that the shock will push prices higher and growth lower. Beyond that, the policy implications will depend on how the broader inflation process evolves.

Q: For you, would April be either too soon to act or inappropriate because there will be no updated projections?
A: A full forecast round obviously provides a much richer basis for decision-making. But we also have alternative scenarios, and those can be updated at each meeting if necessary. So every meeting is live. That does not mean the answer for April is yes or no today. It means simply that our modus operandi is to assess conditions meeting by meeting. That approach has served us well, and I support maintaining it. Again, though, I would remain attentive to possible nonlinearities in the behavior of firms and households. And we may have more data on that already in April.

Q: Do you see much potential for problems in U.S. private credit to spill over to the euro area?
A: That is certainly one source of vulnerability, though not the only one. The good news is that Europe’s banking system is well capitalized and robust, which supports confidence. But the risks are real, and they have to be monitored.

Q: Do you already see second-round effects?
A: Not to any significant extent yet. What I see at this stage is the possibility of second-round effects, not clear evidence of them. That is something we need to be attentive to. The fiscal response will be critical here. If governments resort to overly broad support measures, the likelihood of nonlinear effects rises substantially.

Q: Anything else you would like to add?
A: Just one clarification. Last Friday, when I referred to a relatively large increase in inflation this year, I was speaking about Latvia, which is a small open economy with somewhat higher sensitivity to energy shocks. For the euro area as a whole, my point was that under the baseline the increase would be closer to 1 percentage point this year.