European Central Bank official Kazaks warned: "It is too early to talk about interest rate cuts now," and inflation risks still need to be monitored.

Written by: Zhang Yaqi

Source: Wall Street Journal

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

Kazaks said in an interview with Reuters on Thursday, “Given the data we have received so far, I believe the timing for discussing interest rate cuts is not yet ripe.” 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 are a clear signal to investors: despite the European Central Bank halving its policy rate over the year ending June this year, decision-makers have not diminished their vigilance regarding inflation. After 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' speech suggests that any future rate cuts are not a done deal.

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

Focus on the inflation forecast for 2026-2027

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

Kazaks particularly emphasized the forecast figures for 2026 and 2027. He pointed out that “the transmission of monetary policy takes one to two years,” so the data for the next two years is more valuable for reference compared to the more uncertain longer-term forecasts. He believes that “the margin of error for a three-year forecast is quite wide, especially at the current level of uncertainty.”

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

The risk of rising inflation cannot be ignored.

When assessing the inflation outlook, Kazaks acknowledged that there are some factors that could lower inflation. He mentioned that the potential delay of the EU ETS2 emissions trading system would “flatten” the inflation curve. Additionally, the dumping of overseas goods in the European market and the potential appreciation of the euro are also seen as downward risks to inflation.

However, he also pointed out that these downside risks are “more well-known.” He warned that policymakers should not overlook the upside risks of inflation, such as the price pressures that could arise from trade fragmentation. Kazaks reiterated that central bank colleagues should “continue to monitor core inflation, which has consistently been well above 2%,” indicating that controlling potential price pressures remains a core concern for the European Central Bank.