European Central Bank (ECB) Governing Council member Martins Kazaks has emphasized the importance of patience in shaping monetary policy, cautioning against the risk of making the gravest mistake – cutting interest rates too early, which could lead to a resurgence in inflation. Kazaks suggested that while interest rates are expected to decrease, there should be no haste in initiating the process, stressing the potential consequences of premature easing.
Speaking to Bloomberg Television’s Maria Tadeo in Riga, Kazaks stated, “That would be by all means worse than waiting just a bit. We’ve seen from the ’70s and ’80s that if one starts to be relaxed too early, then there’s the risk that inflation starts to come back and then one would need to raise rates much more.”
These remarks follow the recent decision by the ECB to maintain its deposit rate at a record 4% for the third consecutive meeting. Despite market expectations for a cut as early as spring, President Christine Lagarde’s less forceful pushback has increased investor bets for an April move, with policymakers seemingly converging around a June adjustment.
However, Kazaks’ warning did not deter market sentiment, and bonds continued to gain on Friday. Money markets are still indicating a nearly 90% chance of a quarter-point cut by April, with an expected easing of 146 basis points throughout the year. The German two-year yield, sensitive to monetary policy, reached its lowest in 10 days, reflecting ongoing market expectations.
In Vilnius, another Governing Council member, Gediminas Simkus, expressed cautious optimism, stating that while he is less optimistic than the markets regarding an April rate reduction, he remains open-minded and will assess incoming data. He noted, “The further we go into the year of 2024, the likelihood of a cut increases.”
Boris Vujcic, a Croatian member of the Governing Council, highlighted that there was no perceived shift in tone from the ECB during Thursday’s meeting, refuting the notion that Lagarde’s news conference was dovish. He added, “But lately I have the feeling that markets take whatever you say as being dovish. They have been very trigger-happy.”
Despite a notable slowdown in inflation last year, ECB officials remain cautious, particularly concerning robust wage growth and potential sustained price pressures. Labor-market risks persist, and concerns about a mild economic downturn in the second half of 2023 add to the complexity of the central bank’s decision-making process.
Kazaks acknowledged the possibility of a recession and emphasized that the starting point for any easing cycle will determine the increments in which borrowing costs are reduced. He stated, “There are many ways to get to 2% — you could do earlier smaller steps or you could somewhat later larger steps — that will be all data dependent.”
