MNI INTERVIEW: Uncertainty 'New Normal' For ECB - Kazaks

The European Central Bank’s success in delivering monetary policy goals has come despite a “new normal” of heightened uncertainty, and policymakers are well-positioned to respond to any shocks, Bank of Latvia Governor and ECB Governing Council member Martins Kazaks told MNI.

"The uncertainty remains high. More so due to geopolitical shifts, the risk of trade wars and all that kind of stuff, it’s still there, and there is nothing normal about that in terms of recent history, in my view. But it is the new normal now," Kazaks said in an interview on the sidelines of the ECB's annual summer forum at Sintra in Portugal.

"But if I take a look at the monetary policy and the ECB, I can fully agree with President Lagarde saying that we are in a good place. We have delivered. We are at around 2% and I think we can, by and large, say that the high inflation episode has been resolved.” (See MNI SOURCES: ECB Projections Confirmed So Far, Sept Cut Likely)

WELL PLACED

With inflation expectations under control, the central bank is in well placed to respond to any contingencies, Kazaks said.

"Inflation expectations remain anchored at around target, policy rates are around neutral territory. So the next thing is to ensure that inflation remains at around the target, and we are in a situation that we can deal with any shocks that will potentially hit us -- and we have quite a lot of flexibility on our hands," he said, noting the ECB was "in a good place."

Speaking the same week as the ECB published its assessment of the 2021 Strategy Review, Kazaks said its strategy was "very well fitted" to deal with the issues faced in recent years, adding that the assessment "just completed shows it been so."

"Overall, we’ve done a good job. We should remain data dependent, meeting by meeting, with full flexibility," Kazaks said.

TOOLKIT DISCUSSION

Though the messages from the strategy assessment were clear, Kazaks said there had been a discussion about the policy toolkit.

"Was there a bit more debate about the toolkit? Of course there was discussion about that, especially in terms of the non-standard measures, QE, negative rates etc," he said.

"There is clarity on the [inflation] target, there is clarity on the instruments, we have more experience with some of the instruments. But implicitly, we will keep our minds open and we will react flexibly in the spirit to do best as we can to deliver the target," Kazaks said.

He warned not to read too much into the nuances of language in the assessment, saying "the decisions that will need to be taken some time in the future will be very much dependent upon context." (See MNI INTERVIEW: ECB's Wunsch Sees Downside Growth, Price Risks)

COMMUNICATION

When asked whether financial markets understand the ECB, a topic which came up during debates on central bank communications in Sintra, Kazaks replied: "by and large, yes."

"And I think this is the result of joint work and joint discussions. And also I think it’s important," he added.