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Cautious approach to ECB rate cuts: Kazaks emphasizes vigilance on inflation


Cautious approach to ECB rate cuts

The European Central Bank (ECB) should approach the reduction of borrowing costs with caution, implementing such changes gradually to prevent any resurgence of inflation. This recommendation comes from Martins Kazaks, a member of the ECB’s Governing Council. Kazaks' viewpoint highlights a strategic approach to monetary policy, focusing on maintaining economic stability while carefully monitoring inflation trends.


By advocating for a gradual reduction in borrowing costs, Kazaks aims to ensure that any positive momentum in the economy is sustained without triggering a new wave of inflationary pressures. His cautionary stance underscores the importance of not rushing into policy changes that could potentially destabilize the economic recovery that is currently underway.


Last week, the ECB took its first step in reducing the deposit rate, an action described by Kazaks as “good news.” This move signaled to the economy that the stringent monetary policies, which had been put in place to combat high inflation, might no longer be necessary. Kazaks elaborated on this point during his statements on Wednesday, indicating that the initial rate cut was a positive indication that the economy might be ready to operate under less restrictive monetary conditions.



However, he tempered this optimism with a note of caution. While there is a “hope” that further cuts could be implemented within the year, Kazaks stressed that officials need to proceed carefully. This measured approach is essential to ensure that the progress made in controlling inflation is not undone by premature or overly aggressive rate cuts.


Kazaks emphasized the importance of monitoring inflation closely, noting that it can be unpredictable and may sometimes re-emerge unexpectedly. “It’s dependent on how inflation behaves — inflation can sometimes come back,” Kazaks stated in an interview with the public broadcaster LTV. This statement highlights the inherent uncertainty in economic forecasting and the need for vigilance in policy-making. By insisting on the need to be “convinced that inflation remains at a low level,” Kazaks is advocating for a data-driven approach to monetary policy, where decisions are based on clear and sustained trends rather than short-term fluctuations. This cautious perspective reflects a broader understanding of the complexities involved in managing inflation and the potential consequences of premature policy changes.


Following the initial rate cut this month, ECB officials have adopted a deliberate approach to their next moves, reflecting a careful consideration of the current economic conditions. Despite a significant retreat in inflation from its double-digit peak, recent data suggest that price pressures remain stubbornly persistent. This persistence is evident in several economic indicators, including wage gains, economic activity, and growth in consumer prices, all of which have surpassed analyst estimates.



The resilience of these indicators suggests that inflationary pressures have not been fully eradicated, and this necessitates a cautious approach to further rate cuts. By taking their time to assess the situation, ECB officials are ensuring that their policies are responsive to the latest economic data and trends, minimizing the risk of unintended consequences.


Kazaks, who is known for his hawkish stance on the Governing Council, has been particularly vocal about the risks of inflation returning. This week, he reiterated his concerns, warning that “inflation has a tendency to return.” His warnings are a reminder of the cyclical nature of inflation and the challenges associated with achieving long-term price stability. Kazaks’ perspective is informed by historical trends and the current economic context, which suggests that while progress has been made in reducing inflation, the underlying pressures may still persist. This view supports a more conservative approach to policy changes, ensuring that any adjustments are made with a full understanding of their potential impact on inflation dynamics.


On Wednesday, Kazaks further elaborated on the conditions that would warrant additional rate cuts. He stated that future decisions will depend on the ongoing economic developments and whether inflation is moving toward the ECB’s target of 2%. “At the moment we’re still not there, but the forecasts show that in the second half of next year we’ll be there,” he noted. This statement underscores the importance of economic forecasts in guiding policy decisions and highlights the need for flexibility in responding to changing economic conditions. Kazaks’ cautious optimism reflects a balanced approach to monetary policy, where positive forecasts are tempered with a recognition of the uncertainties and potential surprises that could arise.



Kazaks’ remarks also emphasize the need for a step-by-step approach in implementing policy changes. By taking incremental steps and closely monitoring the results, the ECB can ensure that its actionsare effective and do not inadvertently disrupt the economic recovery. This methodical approach allows for adjustments to be made as new data becomes available, ensuring that policy decisions are well-informed and responsive to the latest economic trends.


In summary, Kazaks’ perspective highlights the importance of caution, vigilance, and flexibility in monetary policy, ensuring that the ECB’s actions support sustained economic stability and growth while mitigating the risk of a resurgence in inflation.


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12.06.2024



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