By David Barwick – FRANKFURT (Econostream) – The European Central Bank can afford to wait before deciding whether further monetary policy tightening is needed, with recent developments having sharply reduced the probability of negative scenarios and removed any need to rush into another move, ECB Governing Council member Mārtiņš Kazāks said.

In an interview with Econostream on Friday (transcript here), Kazāks, who heads Latvijas Banka, said that “with current developments, the probabilities of the negative scenarios have fallen massively” and that the distribution of outcome probabilities had shifted “toward more benign scenarios.”

“That means the monetary policy response is likely to be less aggressive than it would have been under those earlier developments,” he said. “Where exactly we will be at the next meeting, we will see when the data come in.”

Asked whether that argued for waiting rather than acting again already in July, Kazāks said: “There is no urgency. If anything, current developments do not show that we need to rush to catch up with anything.”

“A wait-and-see mode is therefore very appropriate,” he continued. “The shock is smaller, and with a smaller shock, nonlinearities are likely to be smaller. We can take more time to see how it feeds through to the economy, corporates and households, and then be more measured in our response.”

Kazāks said that the shock had run for three months, meaning that some persistence had been created and that the ECB’s June hike had been appropriate.

“But at this stage we can be relatively moderately paced,” he said. “There is no rush. We can see the data coming in. There is no urgent need for a hurried or forceful reaction at this moment.”

From today’s perspective, with the new agreement and shipments resuming, “the shock and its persistence have become smaller,” he said. “If the shock is smaller, nonlinearities should pose less of a threat.”

At the same time, the ECB would take incoming inflation data seriously, Kazāks said, observing that the Governing Council had lacked a detailed accounting of high services inflation at its June meeting.

“If its composition is bad, and if it is further confirmed in the June inflation data, of course we will take it seriously,” he said.

Kazāks said the shock seemed to be drawing to a close, though there were still many uncertainties, including whether shipments would recover and whether other shocks would follow.

“The current geopolitics provide a relentless supply of negative supply-side shocks,” he said. “They build on top of each other. There is always something going on.”

Asked what would make him want to move again in July, Kazāks cited oil or energy prices jumping significantly with no clear end to the shock, strong fiscal support, wage repricing, nonlinearities or renewed corporate pricing pressures.

“But none of these effects seems very likely at the moment,” he said.

“We are again in a position of having the luxury to wait and see,” he said. “The calming of the conflict reduces the risk of nonlinearities and second-round effects, and gives us more time to see what happens with the economy and what the monetary policy response should be.”

“From today’s perspective, the necessity of an aggressive response has come down significantly,” he said. “There is currently no need for multiple hikes in a rushed way.”

Spot inflation data, including core inflation, remained important for July because they showed the extent of indirect effects, Kazāks said. But so far, the ECB had not seen sizable second-round effects, with weaker fiscal support and a weakening economy reducing the risk of such effects, he said.

Nonetheless, “the overall situation for inflation to calm down quickly is still thin ice,” he said.

Asked whether the time until July was more a chance for data to confirm that June had been enough or to confirm that more was needed, Kazāks said, “Both possibilities are there.”

“We need to see how a wide set of data develops, not just inflation itself but also the strength of the overall economy and the labor market,” he said.

Kazāks declined to characterize a potential July hold as a pause before a September move, saying the ECB remained meeting-by-meeting and data-dependent.

“Some of the shock is already baked in, so we need to see that in the data,” he said. “Three months is a relatively long period; it was not one week of high oil prices or one month. Some things have been set in motion. How much, we do not yet see.”

“The good thing is that so far, we have not seen strong second-round effects,” he said.

By “strong,” Kazāks said he meant that the data did not show second-round effects “being clearly visible and growing in importance, or nonlinearities about to be realized.”

“Those risks are relatively small now, perhaps unlikely, unless there is another shock down the road,” he said. “But that would be a different scenario.”

All ECB meetings are live, Kazāks said, and the Governing Council does not act only at projection meetings.

“If the argument is to wait for September because more data will be available, then one could also say wait for December because December will have more data than September,” he said. “Unfortunately, decisions have to be taken with incomplete information.”

Kazāks also said that rate hikes embedded in the forecast did not necessarily oblige the ECB to deliver them.

“Not necessarily, because the environment can change,” he said. “This is a global shock, so it can push up global prices, including prices of items Europe imports. But uncertainty is very high and it can go either way. We might stay where we are, or we might hike again at some point.”

“The urgency is not there, so we have the luxury of waiting,” he said. “Still, in terms of policy, we are well positioned to react to whatever data comes in.”

Kazāks said the mild, adverse and severe scenarios did not have different policy responses embedded, but instead used the same rates as the baseline, making them “more like sensitivity analysis.”

Monetary policy transmission was good, he said, meaning that the ECB did not need large moves to set transmission in motion.

“That gives us the possibility of a measured response, step by step, while seeing what happens with the economy,” he said. “We can be more patient. There is no need to rush, no need for massive moves. We can be relatively incremental.”