ECB rate pause now may be too early: policymaker

Latvian policymaker Martins Kazaks stated on Saturday that it may be premature for the European Central Bank (ECB) to halt interest rate hikes. Kazaks believes that stopping the fight against inflation now could result in the need for more drastic measures later, causing greater harm to the economy. The ECB has been raising rates at its past nine meetings to combat inflation, but with recession risks looming, slowing inflation, and moderate wage growth, policymakers are considering a pause. Kazaks emphasized the importance of another modest rate increase as a safer option, rather than delaying and potentially requiring more significant actions in the future. He mentioned that markets currently see a 50% chance of another hike in September, with a move by the end of the year highly likely. Kazaks also highlighted the possibility of cutting rates if necessary, but emphasized the importance of taking action sooner rather than later to avoid the need for more substantial rate increases. However, he stated that he will approach the September policy meeting with an open mind and will need to review new staff projections before making any commitments. Kazaks also stressed that even if the ECB decides to hold rates, it should make it clear that more policy tightening could be necessary. He argued that the current ECB projections, which anticipate inflation reaching its 2% target only in late 2025, are too late. The consideration of a pause in rate hikes is partly due to economic growth indicators pointing towards a contraction in the third quarter, despite a potentially record-breaking tourism season. Both the industry and services sectors are showing signs of softening, with indicators falling below expectations. However, Kazaks believes that a deep recession is unlikely as the bloc still displays resilience, and some softening in the labor market is desirable to control inflation. He suggested that once rates reach their peak, they should be held at a plateau for some time, and rate cuts should only be considered when projections indicate a risk of inflation falling below 2%. Kazaks stated that he would be willing to start cutting rates when inflation projections consistently undershoot the 2% target. Market expectations currently anticipate a rate cut in the second half of 2024, which Kazaks considers consistent with the macroeconomic outlook.