The Zhitong Finance App learned that ECB Management Committee member Martins Kazaks (Martins Kazaks) said that in the face of multiple opposing forces in the global economy, the ECB is in a position to spend some time analyzing inflation dynamics. The governor of the Central Bank of Latvia said in an interview that the continued rise in oil and gas prices is expected to keep the increase in consumer prices high, while the sell-off of government bonds in recent weeks may begin to drag down economic activity.
“My feeling is that inflationary forces will still prevail in the short term,” said Kazax, who is attending the International Monetary Fund (IMF) annual meeting in Bangkok. “The policy direction is therefore clear, even if there is no urgent need to adjust interest rates right now. We're not lagging behind, and in that sense, we're in a good position.”
Since the outbreak of the war in Iran this year, the ECB has raised interest rates twice, and officials are debating what to do next. As inflation approaches 4%, some have indicated that further tightening may be needed to return to the 2% target.
Bank of Belgium Governor Pierre Wunsch (Pierre Wunsch) said this week: “We will probably have to raise interest rates again” — even if uncertainty is high. His Lithuanian colleague Gediminas Simkus (Gediminas Simkus) shared the same opinion, saying recent evidence suggests there is a need to raise borrowing costs.
Kazaks stressed that the upward risks facing inflation “still outweigh the downside risks facing economic growth.” However, he pointed out that the threat to economic expansion “is likely to be more nonlinear.”
Kazax said that in such a complex context, as interest rates break through levels that are estimated to limit the economy, the Frankfurt-based institution's decisions may become more complicated. “The trade-off of monetary policy is going to get trickier,” he said. “Decisions have been relatively easy so far. But now there's a lot of uncertainty and very low visibility.”
France's plight
Adding to the challenge is France: it has been a leader in recent bond sell-offs at a time when the government is struggling to reduce its budget deficit. Yields in other highly indebted Eurozone countries are also rising, raising concerns that market trends will hinder the transmission of monetary policy and force the ECB to intervene.
“Unjustified fluctuations in financial markets can be a cause for concern, but that doesn't mean any pressure on financial markets will become our problem,” Kazax said. “There is still time to resolve the financial issues, and I urge that this be done as soon as possible.”
The French government has submitted plans to narrow the deficit, and now it needs to prove to tight financial markets that it can deliver. Speculations about the ECB's possible intervention continued to heat up after the premiums on German treasury bonds demanded by investors rose to the highest level since the Eurozone crisis.
However, Kazax said that monetary policy should not be mixed in by lowering French borrowing costs.
“To think of it as the solution to all problems would be extremely short-sighted and counterproductive. Of course, we have a stake in the transmission of monetary policy, and we will continue to pay attention,” he added. “If things get out of order, we will do what is necessary. But we shouldn't try to solve every possible problem.”
Minimum reserve requirements
Kazaks also addressed a topic that has been discussed for some time — minimum reserve requirements. Raising the minimum reserve will remove liquidity from the market and help quantitative austerity; at the same time, it will also reduce interest payments by central banks to help them make up for losses accumulated due to quantitative easing.
“If we have a policy reason to use it, then we should,” Kazax said. “We'll explain it clearly to the market so that our reaction function can be understood, then it's fine.”
Simkus of Lithuania said on Wednesday that “there is nothing wrong with discussing this matter” and that the current level is not “set in stone.”