By Marta Vilar – SINTRA, Portugal (Econostream) – European Central Bank Governing Council member Mārtiņš Kazāks said on Wednesday that the ECB was under no pressure to act urgently or deliver repeated interest rate hikes in the current environment.
Speaking on the sidelines of the ECB Forum on Central Banking in Sintra, Portugal, Kazāks, who heads the Latvijas Banka, told CNBC that the conflict in the Middle East appeared to be easing, while oil prices had declined.
“That means that the inflation has been significantly lower, although above our target, but it is lower and most likely not high enough to hit off and kick off strong non-linearities,” he said. “We have not seen very strong second-round effects either.”
At the same time, Kazāks cautioned that the spike in energy prices over recent months had “put in motion some of the inflationary pressures,” meaning the ECB still needed to remain vigilant.
“But with the shock weakening, I think we can be more gradual in our response and we can be measured, more measured in our response,” he said.
Kazāks said that, based on the current outlook, there was no need for the ECB to act urgently or embark on a series of consecutive rate increases, while noting that the situation could still change before the Governing Council's next meeting.
“Of course, till our next monetary policy meeting, there is still three weeks to go and the world is full of surprises,” he said.
Despite acknowledging that policymakers always had to consider the risk of unnecessarily harming the economy, Kazāks said the ECB remained fully committed to returning inflation to its 2% target and would do “what is necessary” to achieve that.
Kazāks said the ECB's baseline projections pointed to real compensation per employee remaining slightly positive this year, with real incomes expected to grow by around 1% annually over the following two years.
As a result, he argued that workers would face less pressure to seek wage increases to compensate for inflation than during previous inflationary episodes, reducing the risk of significant second-round effects.
However, Kazāks warned that “we are not out of the woods yet,” describing inflation as having the “nasty property of being sticky or rooting in.”
He reiterated that the ECB had to remain watchful and stand ready to act if needed, while adding that in the present situation “the urgency in my view is not there.”
“Currently the good thing is that inflation seems to be relatively low without a massive drive to go up,” he said. “That is somewhat comforting, but of course there is no reason to be relaxed about it.”
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