ECB’s Kazaks Warns Against Going Too Far With Interest-Rate Cuts
(Bloomberg) -- The European Central Bank should lower interest rates further but probably won’t need to take them to levels that would stimulate economic expansion, according to Governing Council member Martins Kazaks.
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In an interview, the Latvian official argued that inflation isn’t on track to fall below 2%, and that the ECB can afford to gradually trim borrowing costs to the point — known as neutral — where they stop restricting growth.
All the same, all options remain on the table as Europe faces risks from geopolitical conflicts to a potentially more hostile trade environment under the presidency of Donald Trump, he said.
“The direction for rates is down — we’re clear about that,” Kazaks said. He added, however, that he’d be “very, very cautious” about going below the neutral rate as the economy isn’t that weak and the ECB’s current outlook doesn’t suggest inflation will fall short of the target for long in years ahead.
The ECB cut rates for a fourth time last week, signaling that further easing is on the way in 2025. While officials haven’t given clear indications on the end-point, they’ve begun debating whether the region’s faltering recovery may warrant deeper reductions — potentially to levels that boost activity.
Economists reckon there’ll be quarter-point decreases in the deposit rate from its current level of 3% at every meeting until June, leaving it at 2%. Investors see a more aggressive path that takes borrowing costs to 1.75% by fall 2025.
Those market bets are “not massively out of line with our baseline scenario,” according to Kazaks.
Discussions over neutral are complicated by the fact that it can’t be accurately measured in real time. Kazaks estimates it to be “closer to 2% rather than 3%,” while President Christine Lagarde has cited a range of 1.75% to 2.5%.
Some, including France’s Francois Villeroy de Galhau and Italy’s Fabio Panetta, say going lower still should be considered. Others, like Executive Board member Isabel Schnabel, warn against pushing too far, which could squander valuable policy space trying to tackle structural issues that rate cuts can’t fix.
Kazaks’s current term ends on Dec. 21, with Latvia’s parliament set to vote on whether to reappoint him two days earlier. He faces two other candidates in his bid to secure a second term.
The 51-year-old said monetary policy shouldn’t be the main lever with which to steer the economy — especially when growth is weighed down by issues like demographics and obstacles in international capital flows.