ECB Mustn’t Overreact To 2028 Inflation Forecasts, Kazaks Says
WinkelmannThe European Central Bank must be careful in interpreting the inflation projections it will receive in December and avoid erratic policy decisions, according to Governing Council member Martins Kazaks.
The European Central Bank must be careful in interpreting the inflation projections it will receive in December and avoid erratic policy decisions, according to Governing Council member Martins Kazaks.
While a first glimpse of estimated price trends in 2028 will help officials assess whether the ECB is still on track to its 2% target, elevated uncertainty means the likelihood of revisions is unusually high, the governor of Latvia's central bank said in an interview. He added that steadiness is a virtue policymakers should uphold.
"The 2028 forecast will be very important to look at, to see where inflation dynamics are going, but I would not overestimate the importance," Kazaks said. "Uncertainty remains high and is unlikely to disappear, so forecasts will come with a very large margin of error."
The ECB held its deposit rate at 2% on Thursday and President Christine Lagarde reiterated that policy continues to be in a "good place." While she refused to be drawn on whether December may see another cut — adding to eight so far this cycle — her assessment of the economy signaled that the bar may be high.
"If we see that we need to move, then we move — but we don't need to be jumpy," said Kazaks. "The steadiness of our policy decisions is an advantage."
In September, the ECB predicted inflation rates of 1.7% next year and 1.9% in 2027. An update is due in December, when economists will add 2028 to the outlook, with the magnitude and direction of revisions still very much unclear.
Kazaks's comments are in line with those of Austria's Martin Kocher, who also played down the significance of the 2028 forecasts.
"The 2028 projection is of course a projection that is far out into the future," he told Bloomberg Television. "So putting too much weight on this projection, on this single data point, I think would not be appropriate."
In this situation, it was reasonable to wait for new data and especially for our comprehensive business cycle forecast in December, which includes an estimate of inflation in 2028 for the first time.
Heightened uncertainty is one reason why Kazaks concurs with Lagarde on rates being in a "good place."
"We are practically at around 2%, inflation expectations are well anchored, and we have the credibility to keep them there," he said. "The market understands our steady-hand approach, and that gives us time to really monitor the situation."
Traders aren't betting on any more rate cuts this year and see a less than 50% chance of one materializing by September 2026. Economists predict borrowing costs will remain on hold all the way through 2027.
Kazaks argued that since the last Governing Council meeting in September, the economy has "more or less developed within the confines of the baseline," while threats to the outlook have become more manageable.
"Inflation risks are more balanced," he said. "Risks to growth as well because some — including those related to trade — have diminished for now. But I would still say they're tilted somewhat to the downside. Growth is quite weak and vulnerable rather than solid, and uncertainty is very high."
