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The European Central Bank has the “luxury” of not needing to rush to raise interest rates, one of its top policymakers has said ahead of a crucial monetary policy meeting next week.
Mārtiņš Kazāks, governor of the Bank of Latvia and a member of the ECB’s governing council, told the FT that while “uncertainty remains very high” because of the situation in the Middle East, the “data that we currently see” does not create an urgency to raise interest rates from 2 per cent.
Expectations for inflation are currently contained and there have been limited knock-on effects from higher energy prices to the rest of the economy so far, he said. Oil prices had also come down from their post-Iran war peak and European gas prices are far less elevated than in 2022, he noted.
“We are not in a rush,” said Kazāks. “We still have the large luxury of collecting data and forming our view,” he argued.
This position was also created by “the tough decisions that we made in the past” to tackle Europe’s last big inflation surge in 2022, although he stressed that “we will of course move if we see it [is] necessary”.
Investors are pricing in two quarter-point increases in the ECB’s benchmark interest rate by the end of the year to 2.5 per cent, according to Reuters data. But traders are currently ascribing only a 15 per cent chance to a quarter-point rise as early as April 30, when the ECB will next set rates.
Earlier in April, investors had bet on up to three quarter-point increases by the end of the year.
Kazāks said that, while the conflict in the Middle East had lasted for nearly two months, “many of the wounds are still very fresh” and “every week brings something new”. The war’s impact on the real economy is only “gradually feeding through”.
The ECB’s success in tackling the unprecedented surge in inflation after Russia’s 2022 full-scale invasion of Ukraine was giving it leeway in the current situation, he said. Interest rates were now at a level where they were neither pushing growth nor slowing it down, Kazāks added.
“We delivered last time and we have been at the [ECB’s 2 per cent inflation] target for about a year,” he said, adding that this meant the central bank’s credibility “in my view is quite strong”. This put Frankfurt rate-setters in a position where they could “monitor what happens and then take the decision when we have the broader picture”.
However, Kazāks also stressed that the ECB’s swift actions in 2022 showed “very clearly” that “if necessary, we can move in bigger steps”. Between July 2022 and September 2023, the ECB raised interest rates from minus 0.5 per cent to 4 per cent in 10 steps.
ECB president Christine Lagarde also this week talked down the likelihood of a rate increase this month. She said in a speech in Berlin that the “double uncertainty” over the length of the Middle East conflict and the size of the spillover effects on the wider economy “argues for gathering more information before drawing firm conclusions for our monetary policy”.
