MNI INTERVIEW: Some Upside Risk For Eurozone-Kazaks

Risks for the eurozone economy may now tilt fractionally to the upside, Bank of Latvia governor Martins Kazaks told MNI, adding that very loose policy would be risky once the pandemic crisis is over.

"One has to be aware of the possible negative side effects," of loose policy, Kazaks said in a video interview. "My view of the situation is that the glass is half full, rather than half empty. To me, the risks are balanced. And I would even say that on a good day maybe there is more upside risk than downside risk."

Some eurozone countries are likely to see inflation at 2% or higher by the second half of the year, he noted, though he added that this level of inflation will probably not last.

"The key point is that if we stay within our current forecast then this rise in inflation is transitory and we must see through it," Kazaks said.

YIELD SPIKE RESPONSE

Asked about the ECB's decision to consult its governing council at its March 11 meeting before announcing that it would step up the pace of its Pandemic Emergency Purchase Programme in response to a rise in bond yields, Kazaks said it was appropriate for the Bank's executive board to seek a green light despite its mandate to oversee asset-buying operations within quarterly guidelines agreed with the council.

"The governing council first agreed about the size of the envelope, and then if we fall short of it, I would say that the governing council needs to provide its consent about this as well. Operationally there are guidelines for the executive board to act," he said.

"We saw the rise in yields as premature. And it was possible to demonstrate that our reaction function is symmetric, saying that the purchase volumes can go up or down given the situation," he added.

ECB President Christine Lagarde's consensual approach to decision-making is not becoming a problem, Kazaks said.

"Monetary policy can only be effective if there is credibility, and credibility can be only assured if the council can agree.

"There are people on the dovish side and people on the hawkish side, but I don't think that it's going to become increasingly difficult," he said.

The ECB's strategy review set to be concluded later this year is likely to provide guidelines rather than any clear blueprint for future policy action, according to Kazaks.

"We can come up with a set of issues that will be fully aligned and agreed upon. We should state key principles, draw some lines here or there," he said, "But it's not going to be a TV manual - push the button, get this, get that. I don't think that one should expect a recipe or a blueprint for every situation."