MNI INTERVIEW: Inflation May End ECB's Triple Guidance-Kazaks

The European Central Bank may eventually have to discuss altering its ‘triple-lock’ forward guidance on rate hikes if incoming economic data continues to surprise to the upside, Bank of Latvia Governor Martins Kazaks told MNI.

“At the end of the day, forward guidance is only an instrument, it's not a strategy. It is an instrument that if necessary can be changed,” Kazaks said in an interview.

“Is our view that we need to change it at the current moment? No. May we need to change it some time in the future? We'll be discussing [that] by all means, but not now. This is an instrument that is always up for discussion.”

Following its Strategy Review the ECB said it would only begin raising key interest rates once headline inflation was projected to reach its 2% target within 18 months and remain there for a further 18 months. Core inflation must also be in line with the central bank’s objective, while allowing for a moderate and transitory inflation overshoot.

But that advice could come under pressure if headline inflation stays persistently high, Kazaks said, citing rising energy costs and the eventual emergence of potentially significant wage increases.

SEQUENCING

Policymakers might also revisit their commitment to raise rates “shortly” after the ECB’s Asset Purchase Programme ends, Kazaks said - a change that would allow them to first see how Europe’s economy reacts to the withdrawal of monetary stimulus.

“The sequencing remains as it is," he said, "but we can be somewhat faster in terms of removing the support and raising rates. Of course, we will do it cautiously, gradually, driven by what data shows. To reduce QE, you don't need to be sure when you will raise the rates.”

The word “shortly” is also ambiguous, Kazaks said, adding that the word “after” would be sufficient.

“We will discuss it as well. There have been a couple of attempts when we have touched on it and we decided let's leave it there, because then it will be too much. But of course, at some point, it may go.”

So far the ECB’s December baseline scenario, which puts HICP inflation at 1.8% in both 2023 and 2024, is not under serious threat, Kazaks said, with prices expected to be at or around 2% over the medium-term.

However, the ECB is becoming more cautious as the risk that persistent inflation could take root increases, he said. APP could end this year, he said, paving the way for a rate rise- although he described market expectations of two hikes in 2022 as “far-fetched.”