ECB Policy Update

WASHINGTON (Reuters) – The European Central Bank (ECB) may need to ease its policy sooner than previously anticipated, according to Latvian central bank chief Martins Kazaks. However, he stressed that interest rates do not need to drop to a level that stimulates economic growth.

The ECB has already cut rates three times this year. Some policymakers now suggest that the bank might soon fall short of its 2% inflation target, which could require a cut below the neutral rate into a stimulative territory.

Kazaks stated, "For rates to go below the neutral, the economic baseline would have to be much weaker and there would have to be a clear prospect for a substantial and permanent undershoot of our target." He emphasized that he does not see conditions warranting such a shift right now.

While inflation seems to be decreasing faster than the ECB had forecasted in September, Kazaks clarified that this only means the target might be reached sooner, without fundamentally altering the price growth profile.

Wage and service price growth remains relatively high, and the undershoot in inflation is primarily due to energy costs. Therefore, the ECB must be cautious with its policy, he noted.

"It's possible we'll get to 2% in a sustainable way a tad sooner," Kazaks said, indicating that achieving the target faster may require a quicker pace of policy easing.

Previously, the ECB anticipated that inflation would reach its target by the end of 2025, but some policymakers now believe this could happen a few quarters earlier. While there are calls for a significant 50 basis point rate cut in December, Kazaks advocated a more measured approach, emphasizing the importance of reviewing a broader data set before the December 12 meeting.