ECB’s Kazaks Says Broad, Protracted Recession Could Slow Hikes

(Bloomberg) -- The European Central Bank may slow interest-rate increases if a deep euro-area recession damps inflation, according to Governing Council member Martins Kazaks.

If underlying price pressures strengthen further, however, officials could maintain their swift pace of raising borrowing costs, Kazaks said in a magazine article published for the Eurofi conference.

“The persistence of core inflation and its impact on inflation expectations along with wage dynamics will be key to determine whether a steady pace of interest-rate hikes should be maintained,” Kazaks said. “The risks of a broad-based and protracted recession with a reductive impact on inflation would point towards a slower pace of rate hikes or a pause.”

The Latvian central banker also said the ECB won’t hesitate to lift rates above the so-called neutral rate, where monetary policy is neither expansionary nor restrictive.

Here are some further comments from ECB Governing Council members published in Eurofi:

• Mario Centeno
  • “A clear tightening or even too fast a normalization could unwarrantedly destabilize the transmission mechanism and the real economy, making it harder to achieve the inflation target beyond the short run”
  • “In face of supply shocks, monetary policy ought to be patient; more so given its unprecedented nature”
  • “Even with large shocks and hence unusually high levels of inflation, it is likely that this policy of slow normalization is consistent with inflation converging to target”
  • “We cannot take for granted that inflation expectations will remain anchored under every circumstance; that is why we should be ready for a strong response if inflation expectations destabilize”
• Yannis Stournaras
  • “I believe that inflation has reached close to its peak and will begin a steady deceleration. My view is mainly based on an assumed moderation in energy and commodity prices and a gradual easing of the supply bottlenecks”
  • “In the forthcoming meetings, a further progressive normalization of policy rates will be appropriate, in a meeting-by-meeting approach. Both the timing and the pace of moves will depend on the evolution of our assessment with respect to inflation risks, which may reflect supply disruptions, but also contractionary pressures on prices”
  • “Any resurgent fragmentation risks that would undermine the smooth transmission of the normalization of our monetary policy across all member-states of the euro area must be forcefully confronted”
• Edward Scicluna
  • The Transmission Protection Instrument, or TPI, “has been conceived to ensure that the monetary policy impulse is transmitted evenly across the union, thus preventing the ongoing normalization from falling disproportionally on households and firms domiciled in more vulnerable jurisdictions”
  • “While there are clear monetary policy justifications for this instrument, drawing the line between warranted and unwarranted interventions represents a major challenge”

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