By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Mārtiņš Kazāks said Thursday that the ECB’s April decision not to raise interest rates did not mean policymakers had decided to look through the current inflation shock.

“According to the ECB’s three-pillar policy assessment, no need for immediate policy action in April, yet this does not imply a looking-through approach to current inflation episode,” he said, according to a presentation for delivery at an event.

Kazāks, who heads Latvijas Banka, said stagflation was not part of the current baseline, but that higher energy prices and global uncertainty were raising inflation risks and weakening the growth outlook.

“Inflation is likely to remain elevated for some time, even if the Middle East conflict were to be resolved quickly,” the presentation said.

“The longer the shock persists, the greater the risks of second round effects and inflation expectations climbing up,” it said.

Kazāks said preserving anchored inflation expectations was the immediate priority for monetary policy.

The presentation also said large and persistent inflation deviations would not be tolerated under the ECB’s monetary policy strategy.

Energy markets had moved away from the ECB’s March baseline, Kazāks said.

A slide on Brent crude and TTF natural gas futures said the “Short-term outlook for energy prices” showed that “we are moving away from the March 2026 baseline.”

Another slide said a more persistent conflict would imply higher inflation, pass-through to other sectors and larger second-round effects.

Under scenario figures shown in the presentation, headline inflation would be 2.6% this year, 2.0% in 2027 and 2.1% in 2028 under the March baseline.

In the adverse scenario, headline inflation would be 3.5% this year, 2.1% next year and 1.6% in 2028, while the severe scenario showed inflation of 4.4%, 4.8% and 2.8%, respectively.

For core inflation, the baseline showed 2.3% this year, 2.2% in 2027 and 2.1% in 2028. The severe scenario put core inflation at 2.6%, 3.9% and 2.9%, respectively.

Kazāks said the ECB would continue to decide meeting by meeting and on the basis of incoming data, the inflation outlook and risks, underlying inflation dynamics and monetary policy transmission.

Financial-market inflation expectations remained broadly anchored, according to the presentation, but consumers were becoming more anxious.

A Latvijas Banka analysis included in the presentation suggested that inflation expectations were better anchored than in 2022, but largely because markets expected a stronger monetary policy response.

“Financial markets have tightened financing conditions, supporting policy transmission, but for sustained effect this needs to be reinforced by monetary policy,” the presentation said.

Financial conditions had tightened since the start of the Middle East conflict and credit flows were slowing, according to Kazāks’ slides.

Underlying inflation indicators were stable so far despite external price shocks, the presentation showed, while the ECB wage tracker pointed to slower wage growth ahead.

Fiscal policy remained a possible source of additional inflation pressure, Kazāks said.

The presentation said fiscal responses to higher energy prices were expected to be more limited and targeted, but that risks remained from more expansionary fiscal policy adding to inflation pressure and persistence.

Kazāks also said the Eurozone economy was facing multiple, overlapping shocks whose interaction could generate non-linear effects and increase uncertainty around macroeconomic outcomes.

Slides in the presentation showed elevated trade-policy uncertainty, geopolitical risk and market volatility, as well as a negative impact from geopolitical risk on GDP, consumption and investment.

The presentation also pointed to longer-term risks from China, showing Chinese exports to the U.S. declining while exports to other regions, including the EU and ASEAN, had risen.

Over time, weaker growth could require policy to move in the other direction if it intensified downward pressure on medium-term inflation, Kazāks said.

The ECB’s monetary policy strategy allowed flexible action in either direction, with policy agility particularly important in the current environment, the presentation said.