By Francesco Canepa
DUBROVNIK, Croatia (Reuters) – The European Central Bank can continue to lower interest rates broadly how the market expects if inflation keeps easing as envisaged, ECB policymaker Martins Kazaks told Reuters on Friday.
The ECB lowered its policy rate from a euro-era high last week but held back from any promise to follow up its move, which came with caveats about wages and services inflation staying strong.
Kazaks said inflation would be bumpy and move sideways this year but he continued to believe that it was on its way to the ECB’s 2% target next year, justifying more cuts provided that the data continued to come in as the central bank expects.
“Uncertainty remains high but of course we are on a path of inflation coming down,” the Latvian central bank governor said in an interview on the sidelines of a conference in Dubrovnik, Croatia.
“We can remove some restriction but we should retain some degree of restrictiveness and move meeting to meeting looking at the data,” he said.
He expressed comfort with current market expectations, which are for one or two rate reductions worth 25 basis points each by the end of this year followed by two more next year.
“Currently the market pricing seems to be reasonable but there’s no autopilot,” Kazaks said.
He added there were still a number of variables, such as growth in wages and whether companies would be able to absorb that or would end up passing it on to customers.
“It’s still not a done deal and this is why I would remain relatively cautious,” Kazaks said.
Markets have become more sceptical about the ECB’s ability to cut rates since some stronger-than-expected wages and inflation data last month.
Kazaks cautioned against over-reacting to “one or two” data points that go against the grain.
“Data has been by and large in line with our expectations,” he said.
“For the data to show a deviation from the baseline scenario…changes would have to be persistent and sizeable,” he argued.
And it would take nothing short of a major external shock, such as a geopolitical event, for the ECB to change course and consider raising rather than cutting rates, Kazaks said.
“But if we stay within the baseline scenario then the direction for me is relatively clear and the only question is about the pace and the level,” he concluded. “And we’ll learn about that when we look at the data.”
(Reporting By Francesco Canepa; Editing by Toby Chopra)
