A senior European Central Bank policymaker stated that the ECB has the "luxury" of space to wait before raising interest rates. The ECB is set to hold a key monetary policy meeting next week.
Martins Kazaks, Governor of Latvijas Banka and a member of the ECB Governing Council, expressed that although "uncertainty remains very high" due to the situation in the Middle East, "the data we are currently seeing" does not create urgency to increase rates from the current 2% level.
He indicated that inflation expectations are currently under control, and the ripple effects from energy price increases on the broader economy have so far been limited. He also pointed out that oil prices have retreated from their post-Iran war peaks, and European natural gas prices remain well below 2022 levels.
"We are not in a hurry," Kazaks said. "We still have considerable luxury to gather data and form our views," he argued.
This stance is also supported by "the difficult decisions we made in the past to address the last major inflation shock in Europe in 2022," although he emphasized that "we would certainly act if we deemed it necessary."
Investors expect the ECB's benchmark interest rate to be raised by 25 basis points twice by the end of this year, reaching 2.5%. However, traders currently assign only a 15% probability to a 25-basis-point hike as early as April 30, when the ECB next sets rates.
At the beginning of April, investors had been betting on up to three 25-basis-point rate hikes by year-end.
Kazaks noted that although the Middle East conflict has persisted for nearly two months, "many wounds are still very fresh," and "each week brings new developments." The impact of the war on the real economy is only "transmitting gradually."
He stated that the ECB's successful handling of the unprecedented inflation surge after 2022 has given it room to maneuver in the current situation. Kazaks added that the current level of interest rates is neither stimulating nor slowing down growth.
"We successfully achieved our goals last time, and we have been at the (ECB's 2% inflation) target for about a year," he said, adding that this means the central bank's credibility is "quite strong in my view." This allows Frankfurt-based rate setters to "monitor developments and then make decisions when they have a fuller picture."
However, Kazaks also stressed that the ECB's rapid actions in 2022 "very clearly" demonstrated that "if necessary, we can act with larger steps." Between July 2022 and September 2023, the ECB raised interest rates in 10 steps from -0.5% to 4%.
ECB President Christine Lagarde also downplayed the likelihood of a rate hike this month. In a speech in Berlin, she highlighted the "dual uncertainty" regarding the duration of the Middle East conflict and the scale of spillover effects on the broader economy, stating that this "argues for gathering more information before drawing firm conclusions for our monetary policy."
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