The European Central Bank should keep all options on the table at next month's interest rate decision, Martins Kazaks, member of the ECB's Governing Council, said, as the economic outlook depends on unpredictable geopolitical shocks.
Uncertainty is "considerably higher than it has been for quite some time" due to issues like potential increases in European defense spending, Kazaks said. "We will see what all these external shocks and risks trigger. We to keep an open mind. It's not possible to prejudge the decision in April because we need to see what these alternatives or shocks will look like."
The ECB cut its deposit facility rate by 25 basis points to 2.5% on Thursday as expected, marking its sixth rate cut since June of last year. But at same time, the ECB hinted that a series of easing measures may soon be coming to an end, saying that monetary policy has "meaningfully reduced constraints." Markets pared on further ECB rate cuts, seeing a significant increase in European military spending as potentially stimulating economic expansion and inflation.
Kazaks' comments echoed those of another ECBning Council member, Francois Villeroy de Galhau, who said earlier on Friday that "we need to be ready to act and react quickly" amid "huge."
Kazaks said that aside from sudden political shifts, the performance of the European economy has basically been in line with expectations. He added that the disinflation has been occurring is ongoing. But he also warned that it's not yet a done deal that inflation will return to the 2% target level as quickly as expected "So far, the dynamics and the developments in inflation — or the uncertainty around it — have broadly been in line with our forecasts," he said. "But the also show that there will be a significant adjustment in services inflation in March. We will see in April whether this will materialize."
Meanwhile, there has been a focus whether eurozone interest rates have reached the neutral rate level, which neither stimulates nor restricts economic activity. Most analysts peg that level at around 2%, and imply it may be the end of the road for ECB easing. But Kazaks said not to see it as an endpoint. "It's not our job to reach the neutral," he said. "Our job is to get inflation to 2%. But as the environment changes, of course monetary policy may also change. It [the neutral] should actually change."
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