(Bloomberg) — European Central Bank Governing Council member Martins Kazaks said there’s only a “narrow path” back to 2% inflation — meaning an extension to the euro zone’s unprecedented spate of interest-rate increases can’t be excluded.
(Bloomberg) — European Central Bank Governing Council member Martins Kazaks said there’s only a “narrow path” back to 2% inflation — meaning an extension to the euro zone’s unprecedented spate of interest-rate increases can’t be excluded.
“Even if I’m quite content with current level of rates, we can’t close the doors to further rate hikes,” the Latvian official said Friday.
“The wage story is still there, and the geopolitical risks are still there. You don’t know how it’s gonna play out.”
Speaking in an interview in Marrakech, Kazaks said corporate profit margins must keep shrinking and wage growth must ease for the inflation goal to be met.
That means borrowing costs should stay higher for longer — as markets are now betting.
“If we stay within the baseline scenario, I would see it inconsistent that there would be rate cuts in the first half of the year,” Kazaks said Friday in an interview.
“In the second half of the year, we’ll see.”
The ECB hiked borrowing costs for 10th successive meeting in September — prompting most economists and investors to call time on the aggressive campaign of monetary tightening.
But despite the 20-nation euro-area economy struggling to grow, inflation remains more than double the target and isn’t projected to return to 2% until 2025.
With officials’ focus still trained on prices, a debate is unfolding on whether tougher policy is appropriate elsewhere, such as accelerating quantitative tightening.
The ECB has already halted reinvestments under one asset-purchase program and some want it to do so more quickly under the portfolio it accumulated in the pandemic.
“Even if one isn’t raising or slashing rates, there are other elements that need to be done,” Kazaks said.
“Instruments must be aligned so that they all work in the same direction.”
He stressed that any shifts in the current plan for the PEPP initiative, which envisages reinvestments running through end-2024, should follow the pattern set out in shrinking the APP program.
That would mean a gradual reduction in monthly reinvestments until they’re eventually stopped altogether.
Kazaks’s Baltic colleague, Gediminas Simkus, told Bloomberg earlier Friday that he, too, backs talks on altering PEPP — something that could happen at this month’s ECB policy meeting in Athens.
“We need to discuss because the situation has changed — it’s very obvious,” Simkus said Friday.
“There are all the preconditions to consider stopping it earlier.”
Others aren’t so eager to act.
“We’re ready for debate, but we shouldn’t touch the buttons of reducing the balance sheet at a different pace,” Slovakia’s Peter Kazimir said this month.
“We’ll come to this topic only after we’re sure we won’t have to raise rates further.” That point, he said, may not come until spring 2024.
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