European Central Bank official Kazaks warns that it is too early to discuss interest rate cuts, dousing market expectations.

Written by: Zhang Yaqi

Source: Wall Street Journal

Martins Kazaks, a member of the European Central Bank's Governing Council, poured cold water on market expectations of an imminent interest rate cut, clearly stating that it is too early to discuss further easing of monetary policy given that underlying inflation remains high and risks persist.

In an interview with Reuters on Thursday, Kazaks said, "Given the data we have received so far, I believe the timing for discussing interest rate cuts is not yet mature." This statement comes ahead of the European Central Bank's next policy meeting on December 18, adding uncertainty to the central bank's future interest rate path.

His remarks serve as a clear signal to investors: despite the European Central Bank having halved the policy rate over the year ending in June, decision-makers remain vigilant about inflation. Since June, despite forecasts indicating a slight decline in inflation and moderate economic growth, the European Central Bank has maintained interest rates at current levels. Kazaks' comments suggest that any future interest rate cuts are not a foregone conclusion.

He emphasized that the core inflation rate, "far above 2%," is a key reason for his cautious stance. He believes that the inflation outlook carries two-way risks, and therefore, it is not the time to let down one's guard.

Focus on 2026-2027 Inflation Forecasts

For the upcoming December meeting, new inflation forecasts will be crucial for decision-making. At that time, European Central Bank decision-makers will receive inflation forecast data for the next three years.

Kazaks particularly highlighted the forecast figures for 2026 and 2027. He noted, "The transmission of monetary policy takes one to two years," so the data for the next two years is more valuable than the more uncertain longer-term forecasts. He believes, "The margin of error for a three-year forecast is quite broad, especially at the current level of uncertainty."

According to the latest forecasts released by the European Central Bank in September, the inflation rate for 2026 is expected to be 1.7%, and for 2027, it is expected to be 1.9%, both close to or below the 2% target. The updated data released at the next meeting will serve as an important basis for assessing the central bank's subsequent actions.

Inflation Upside Risks Cannot Be Ignored

In assessing the inflation outlook, Kazaks acknowledged some factors that could lower inflation. He mentioned that a possible delay in the EU ETS2 emissions trading system would "flatten" the inflation curve. Additionally, the dumping of foreign goods in the European market and potential appreciation of the euro are also seen as downside risks to inflation.

However, he also pointed out that these downside risks are "more well-known." He warned that decision-makers should not overlook the upside risks to inflation, such as price pressures that may arise from trade fragmentation. Kazaks reiterated that central bank colleagues should "continue to focus on core inflation, which has remained far above 2%," indicating that controlling potential price pressures remains a core concern for the European Central Bank.

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