JACKSON HOLE, Wyoming (Reuters) – The European Central Bank has the option of cutting its key interest rate, possibly twice more this year, as inflation broadly continues to follow the downward trend expected by policymakers, according to ECB policymaker Martins Kazaks.
The ECB cut interest rates for the first time after a series of record rate hikes in June. Markets are expecting a second measure on September 12 as economic growth remains weak and wage pressures ease, supporting the argument that inflation will return to the two percent target next year.
When asked whether he would support a cut as early as September, Kazaks said inflation was broadly at the level expected by the ECB, so there were still good arguments for a gradual easing of monetary policy.
“We are broadly in line with our forecasts and this is consistent with a gradual decline in interest rates,” Kazaks, governor of the Latvian central bank, told Reuters on the sidelines of the US Federal Reserve’s Jackson Hole Economic Symposium.
“Our June projections were for two more rate cuts this year and at the moment I see no reason why we should not go ahead with them,” he said, adding that he would not decide on September until the inflation figures for August were published and he had seen the ECB’s new projections.
While some of the latest inflation figures have been a positive surprise, Kazaks said that focusing on individual figures risks missing the forest for the trees.
He argued that broader economic trends were consistent with easing price pressures and that this should ultimately lead to lower inflation figures.
“Our forecasts were already assuming relatively rapid wage growth, and we had figures this week that showed a weakening of this wage pressure, which also speaks for a gradual easing course,” said Kazaks. “Companies’ profit margins are also declining.”
Growth in negotiated wages, a key indicator on the ECB’s radar, slowed to 3.6% in the second quarter from 4.7% three months earlier. Economists have already said this argues for a rate cut in September.
However, Kazaks also made it clear that, given the already significant delays, the ECB should not tolerate any further postponement of the date for achieving its inflation target.
“I will be concerned if our forecasts show that the return to the two percent target is postponed until 2026,” he said. “We now expect to achieve it by the end of 2025 and it has been pushed back far enough.”
(Reporting by Balazs Koranyi in Jackson Hole, Wyoming; Editing by Matthew Lewis)
