Unlock the Editor’s Digest for free
The European Central Bank has the “luxury” of not having to rush to raise interest rates, one of its top policymakers said ahead of a crucial monetary policy meeting next week.
Mārtiņš Kazāks, governor of the Bank of Latvia and member of the ECB board of governors, told the FT that while “uncertainty remains very high” due to the situation in the Middle East, the “data we are currently seeing” does not create an urgency to raise interest rates from 2 percent.
Inflation expectations are currently subdued and the impact of higher energy prices on the rest of the economy has been limited so far, he said. Oil prices have also fallen from their post-war peak in Iran and European gas prices are much lower than in 2022, he noted.
“We are not in a hurry,” Kazāks said. “We still have the great luxury of collecting data and forming our opinions,” he argued.
This position was also created by “the difficult decisions we have taken in the past” to tackle Europe’s last big wave of inflation in 2022, although he stressed that “we will of course take action when we see it. [is] necessary”.
Investors are pricing in a two quarter-point increase in ECB interest rates to 2.5 percent by the end of the year, according to Reuters data. But traders currently only assign a 15 percent chance of a quarter-point rise as early as April 30, when the ECB will next set interest rates.
Earlier in April, investors had expected interest rates to rise by up to three quarter points by the end of the year.
Kazāks said that although the conflict in the Middle East had lasted almost two months, “many of the wounds are still very fresh” and “every week brings something new.” The impact of the war on the real economy only works “gradually”.
The ECB’s success in tackling the unprecedented rise in inflation following the large-scale invasion of Ukraine in 2022 gave it room to maneuver in the current situation, he said. Interest rates were now at a level where they neither stimulated nor slowed growth, Kazāks added.
“Last time we delivered and we went to the [ECB’s 2 per cent inflation] He added that this meant the central bank’s credibility “in my view is quite strong”. This put rate setters in Frankfurt in a position where they could “monitor what is happening and then make the decision when we have the broader picture”.
However, Kazāks also emphasized that the ECB’s swift actions in 2022 showed “very clearly” that “we can take bigger steps if necessary.” Between July 2022 and September 2023, the ECB increased interest rates in ten steps from minus 0.5 percent to 4 percent.
ECB President Christine Lagarde this week also expressed the likelihood of an interest rate hike this month. She said in a speech in Berlin that the “double uncertainty” about the duration of the conflict in the Middle East and the extent of its spillover effects on the broader economy “calls for gathering more information before drawing firm conclusions about our monetary policy.”
