By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Mārtiņš Kazāks on Friday said the ECB still had time to assess the economic fallout from the Iran war and could even end up cutting rates if supply disruptions were to push the Eurozone economy sharply weaker.

Kazāks, who heads Latvijas Banka, told Bloomberg that he saw no reason for now to push back against market pricing for two rate increases this year, but made clear that other scenarios remained possible depending on how the shock evolved.

“If shortages set in very quickly and tilt the economy closer to a recession, inflation pressures may turn out to be much, much weaker,” Kazāks was quoted as saing. “Then, of course, you might need to switch your monetary policy in the opposite direction. You might need to cut.”

He said the ECB’s meeting-by-meeting approach meant that “by definition that all meetings are live,” while stressing that this “does not mean that we need to necessarily move.”

For now, Kazāks said, policymakers remained in “monitoring mode” as they watched for spillovers from higher energy prices into broader inflation and wages.

“We’re still very much in a monitoring mode: we’re cautious to see what happens with spillovers, what happens with second-round effects, and so far we have not seen much,” he said. “That reduces somewhat the necessity to move instantaneously.”

Kazāks also said tighter financial conditions were already doing “some work for us,” giving the ECB room to wait, especially after its handling of the 2022 inflation shock strengthened its credibility.

“Our credibility is stronger because we delivered last time, and that gives us more time to see if we need to move and how much we need to move,” he said.

At the same time, he said current market pricing could still prove broadly right if the baseline held and inflation pressures started to spread more visibly through wages and corporate pricing behavior.

“If we see that it starts to spill further — that workers push for higher wage increases, that corporates start to reprice more often — of course we need to move in,” he said. “The baseline is built on the market pricing of two hikes and as long as baseline approximately holds, I would not object to a similar market pricing.”