MNI INTERVIEW: ECB Should Cut In October, Says Kazaks

MNI (RIGA) - The European Central Bank should cut its Deposit Rate by 25 basis points to 3.25% at its October meeting but financial markets risk getting ahead of themselves in pricing monetary easing over the next 12 months, Bank of Latvia governor and ECB Governing Council member Martins Kazaks told MNI.

"Policy matters are always a nuance. Blunt decisions are relatively few. But in terms of the October meeting, I think from today’s perspective, in my shoes, it is a very straightforward decision to cut," Kazaks, not known as a Governing Council dove, said on the sidelines of an event hosted by the Latvian central bank in Riga last week.

"The risks [between growth and inflation] are increasingly balanced, and the risks of a weak economy have become more prominent. From the current data flow we have, it would deserve a fair discussion -- and in my view the decision to cut rates -- in October, so we reduce the risks of the economy being too weak," he said, though also stressing that some time remains until the Oct 17 meeting.

The last few weeks’ data laid out a different environment to that  seen at the time of the September policy meeting, with economic weakness "increasingly prominent", especially in the services sector, Kazaks said. Eurozone PMI is “close to the border line" of 50 points which divides expansion from contraction, he noted.

Cutting in October could mitigate the risk of a quick unravelling of the labour hoarding seen since the pandemic, he said. (See MNI SOURCES: Chances Of October ECB Cut At Least 50-50)

RESTRICTIVE

Even with the "appropriate" 25 basis points, "we would still have interest rates in the restrictive territory, which would still reduce the risks of services inflation taking off again," Kazaks said.

The Bank of Latvia governor was adamant that an October cut should not be seen as either the start of a more aggressive easing cycle, or a bringing forward of a December cut, but as a decision taken solely on the basis of data available at the October meeting.

"We should not link October with December, these are two specific separate meetings. This is not an issue of front-loading or back-loading. We see what needs to be done. We do the assessment at every meeting and this is an appropriate time to do it. December we will see in December," Kazaks said.

RATE CURVE

Kazaks said market pricing of ECB cuts through to December 2025 was "a bit aggressive".

Rates curves suggest the deposit rate will fall to 1.75% by September next year, half its current level.

"Of course no one knows where the future lies. But I think I would warn the financial markets ‘don’t run ahead of yourselves.’ We saw a similar story at the turn of the last year," he said.

"Last year, the differences were so big, the financial markets were pricing something that was not in the [ECB's] baseline scenario. Currently, I think we are still within our baseline scenario.

"Is that scenario consistent with so low interest rates by next year? I would question it very much," he added. "So lets see how the economy fares and then let’s see what should be the pricing."