ECB should sit tight on rates amid uncertain war fallout, Kazaks says
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European flags flutter outside the European Central Bank (ECB) headquarters in Frankfurt, Germany March 16, 2023. REUTERS/Heiko Becker
FRANKFURT, March 3 (Reuters) - The European Central Bank should "sit tight" and keep interest rates steady for now as the impact of the war in Iran remains uncertain, ECB policymaker Martins Kazaks told Reuters on Tuesday.
Traders have started placing some bets on an ECB rate hike this year as disruption to the flow of oil and gas from the Gulf, as well as wider trade snags, threaten to push up inflation in the euro zone.
Kazaks, the Latvian central bank governor, said the conflict may boost inflation but could also depress activity, meaning the euro zone's central bank should wait for the fog of war to clear before acting.
"We should sit tight," he said in a phone interview, adding the ECB may come up with some scenarios about how the war could affect the economy at its next rate meeting on March 18-19.
"But I don't see that we need to rush to do something with policy rates," Kazaks added.
CURRENT RATES 'APPROPRIATE,' KAZAKS SAYS
Money markets price in around a 40% chance of an ECB rate hike by year-end, with bets surging after higher-than-expected inflation data for February on Tuesday. They were pricing in a possible cut only last week
Kazaks said the latest reading would keep policymakers "in a cautious mood" and formed a higher basis on which the energy shock would build. But he played down imminent hikes.
"Current rates are appropriate based on what I am seeing," he said. "Markets were pricing in a cut not so long ago. It's within the high uncertainty interval, I see no need to rush."
Still, he said the ECB should be prepared to move rates in either direction depending on "how inflation develops, how high it is, what are the second-round effects and how persistent it becomes, and if this feeds through into inflation expectations."
"At the end of the day there are opposing forces coming from this shock and it depends on which one is stronger," Kazaks said.
(Reporting by Francesco Canepa; Editing by Bernadette Baum)
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