MNI INTERVIEW: ECB Needs Tightening Debate After Covid-Kazaks

Discussions within the European Central Bank over when and how monetary conditions should start to tighten will come into increasing focus as the Covid-19 crisis eases, Bank of Latvia governor Martins Kazaks told MNI.

"There is no need to lower the yields at the current moment, but we must preserve current favourable financing conditions," Kazaks, a member of the ECB's Governing Council said in a recent interview.

"But when Covid will gradually move out of the picture there needs to be endogenous tightening as the economy recovers and inflation prospects improve. And that, of course, will happen before we raise the rates. What is the timescale? We will see, because it is data dependent."

Should the current outlook for vaccination rates remain valid, Kazaks said, Governing Council discussions over how it sees the acute phase of the Covid crisis ending should happen in the spring, rather than the autumn.

"What we can very clearly say is that one needs to understand that there needs to be discussion of what favourable financing conditions mean," he added. "And with the crisis passing, we will need to allow for endogenous tightening as the economy strengthens. It needs to happen."

Even then, Kazaks emphasised, the scarring caused by the crisis "is not going to disappear just like that. It's going to have repercussions." The ECB's December decision to recalibrate the terms of its targeted longer-term refinancing operations (TLTRO III) not only helps provide funding access and lower lending rates, he said, it should also support bank-based monetary policy transmission at a time when lenders are having to cope with increasing levels of non-performing loans.

EXCHANGE RATE

Kazaks repeated ECB president Christine Lagarde's assertion that policymakers are closely monitoring the euro exchange rate and stand ready to adjust all policy tools as appropriate, starting, he added, with the communication channel.

Asked whether any further adjustments in the policy package can be expected over the coming months, Kazaks, who spoke to MNI via video link on Dec. 29, said it was time to let the already-announced measures take effect, coupled with the fiscal support offered via the EU's Next Generation programme. "Then we'll see," he added.

"There are still plenty of options available," he said. "Both with respect to the current instruments, but also regarding the Covid crisis. The most important thing is that it's data-driven, we act when it's necessary, and we can fine tune [the policy package] at any time if it's needed."

Looking ahead to the outcome of the ECB's strategic monetary policy review, Kazaks said he hoped for a clearer picture of how both the crisis and its aftermath will unfold before the final report is published.

INFLATION TARGET

"By and large we have two stories that overlap," he said. "One is the Covid-inflicted hardships, and the other one is what comes after that. The latter is very much about the inflation target, which is continuously on our agenda but will again become more dominant in a post-Covid situation.

"We shall need to discuss what would be the measures, what would be the instruments, how we would be acting in those future post-Covid conditions. But we should not pre-commit ourselves at the current moment with too specific measures at very specific moments in time, because we should remain data dependent. We should remain open minded in terms of the instruments that we are to use. So the strategy review is appropriate to look at this in a comprehensive way."