TLDR:
- ECB’s Kazaks supports an interest rate cut in October
- Economic risks are becoming more pronounced, with weak growth a concern
- Kazaks warns markets against expecting rapid and aggressive loosening
- Inflation is “on track” but victory can’t be declared yet
- There’s a risk of a sudden softening in the job market
The European Central Bank (ECB) is poised to lower interest rates at its upcoming October meeting, according to Governing Council member Martins Kazaks.
In recent interviews, Kazaks highlighted growing economic risks and the need for cautious monetary policy adjustments in the eurozone.
Kazaks, who heads Latvia’s central bank, stated that recent data clearly points towards a rate cut. He noted that risks to the economy have become more pronounced, with concerns about sticky domestic inflation, especially in the services sector, being increasingly balanced against worries about weak growth.
The ECB official’s comments come amid a backdrop of slowing inflation and tepid economic growth in the eurozone.
September inflation data showed a retreat below the ECB’s 2% target for the first time since 2021, fueling market expectations for monetary easing. Money markets now see an almost 90% chance of a rate cut at the ECB’s October 17 meeting.
While Kazaks foresees further interest rate reductions after October, he urged caution and pushed back against bets on rapid and aggressive loosening. He warned markets against getting ahead of themselves, drawing parallels to overly optimistic expectations at the turn of the last year.
On the inflation front, Kazaks described the disinflation process as “on track” and noted moderating wage gains. However, he emphasized that it’s too early to declare victory over inflation. He stated that interest rates still need to remain somewhat restrictive, even with anticipated cuts.
The economic weakness in the eurozone is a source of worry for policymakers. Kazaks expressed particular concern about a potential sudden softening of the job market. He warned of a possible “tipping point” where companies might start unwinding their labor hoarding due to a slow recovery, potentially triggering a snowball effect.
ECB Vice President Luis de Guindos echoed these sentiments, stating that economic growth risks remain tilted to the downside. However, he expressed expectations for a strengthening recovery over time, supported by rising real incomes and the gradually fading effects of restrictive monetary policy.
The shifting economic landscape has led several analysts to revise their expectations for the ECB’s rate path. Major financial institutions like Goldman Sachs and JPMorgan now anticipate rate cuts at every upcoming ECB meeting.
Despite the likelihood of rate cuts, Kazaks emphasized the need for a prudent approach. He cited factors such as geopolitical risks and the upcoming U.S. elections as reasons for caution.
The Latvian central banker argued against any calendar-based forward guidance on rates, highlighting the high level of uncertainty in the current economic environment.
