Before the European Central Bank (ECB) starts lowering interest rates, we have to make sure inflation doesn’t start going up again, said Bank of Latvia governor Mārtiņš Kazāks in an interview to TV3 programme 900 seconds.
He said that in Latvia, for example, inflation was above 20% at the beginning of the year. However, in September it was slightly above 3%. By the end of the year it will likely drop below 2%, and, although the rapid decline of inflation is an accomplishment, it is still necessary to make sure it doesn’t start going up again.
“It’s one thing to push inflation down. It’s the other to make sure inflation doesn’t go up again after that. This is why there is this caution,” said Kazāks, commenting on when ECB could lower interest rates.
The governor of the Bank of Latvia also stressed that
uncertainty is high, and there are geopolitical risks that may, for example, cause energy prices to go up.
“Inflation is strongly going down, but we still have to make sure it does not start growing again later. It will be more difficult to bring it down in a second attempt – interest rates would have to be increased even further. This is why at the moment we are maintaining rates, and, once we are confident that we have overcome inflation, we will start slowly lowering rates,” said Kazāks.
He also stressed that it is because of this high uncertainty he would rather not speculate with any specific dates as to when rates could start going down.
At the same time, Kazāks said that financial markets are waiting for the existing macroeconomic growth scenario to stay. When the economy is weak in Europe, but there is no major recession, a gradual rate cut could start in the second half of next year.
“Considering the high uncertainty, I believe a much better approach is what ECB has implemented: we look at data, look at facts and make decisions meeting to meeting,” said the governor of the Bank of Latvia.
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