MNI INTERVIEW: Kazaks Sees No Detailed Steer For September

The European Central Bank is unlikely to provide a detailed statement about its upcoming September policy decision after its meeting in July, due to high uncertainty and the large volume of data to be released in the intervening period, Bank of Latvia Governor Martins Kazaks told MNI.

September’s meeting will also see fresh projections, Kazaks noted, adding that if the ECB decides at any point to pause its rate increases then that would not imply that the hiking cycle has concluded.

“At the current juncture, I think we still need some rate hikes down the road … Even if we take a pause, for instance, it does not mean that we may not raise rates thereafter,” he said, adding that market pricing suggesting possible rate cuts early next year is “a mistake.”

Declaring that “September will need to be decided in September,” Kazaks declined to speculate about the wording of the monetary policy statement and accompanying communication in July.

“We'll see when we have the data, because then we will see what aspects need to be clarified and what aspects need to be stressed in the communication to explain our decisions. But data dependence and meeting by meeting, in my view, has always included the possibility that you may raise, you may take a pause,” he said.

High uncertainty means “providing detailed forward guidance is counterproductive because it would just tie policy makers’ hands,” he said.

Clear guidance provided in June for a likely hike in July was due to the release of the ECB’s detailed economic projections, which will not occur next month.

“I think it would be wrong now to say, let's pause in September, then hike in October, something like that, because uncertainty is simply way too high. It is not necessary,” he said.

TERMINAL RATE

Reaching the peak rate “is always going to be a trial-and-error kind of story,” said Kazaks, noting that in his view decisions will be taken after “consistent signals” not only about inflation but also the economy overall.

“I think we will be able to say we are done only ex post,” he said, “You cannot say it's ex ante because you are waiting for information to come in.”

PROJECTIONS

Forecasts are always subject to scrutiny, with more attention deserved by the shorter-range projections, of “a year, maybe two years” because they are more precise than those for the longer end of the forecast horizon, given that “models are often built with a tendency to converge to 2%,” Kazaks said.

Differences between the individual projections of different national central banks in the last forecast round were “in a way good, because then there is more discussion and check of the robustness of the results and that kind of stuff,” he said.

The fact that forecasts are based on market expectations on interest rates also means that if they diverge from the ECB’s view on rates “the forecast becomes outdated on the day its published as the policy decision would shift the yield curve”, he said, noting that that was the case last December.

“I personally think that the interest rates will stay high longer than the markets currently expect,” he said.

(Additional reporting by Luke Heighton)