Martins Kazaks, the governor of Latvia’s central bank and a member of the ECB Governing Council, discussed interest rates on CNBC. He indicated that rates might be nearing their peak, but ongoing uncertainties could change the policy situation. Kazaks stated that the current situation matches the ECB’s 2% inflation target. He suggested that if things continue as they are, rates are almost at their highest point, with a chance for a few more cuts. Future decisions will be guided by new economic data, as Kazaks highlighted the importance of developments in trade discussions. He emphasized the need to monitor these factors before taking any further steps. Three weeks ago, Kazaks expressed a similar viewpoint, urging caution regarding additional rate cuts by the ECB. The next ECB Governing Council meeting is on June 4 and 5. Kazaks’s remarks reveal a growing consensus among policymakers. While rate hikes seem unlikely for now, there’s no urgency to lower them either. This suggests that monetary policy is stabilizing unless new challenges arise. Policymakers appear to be carefully analyzing the incoming data before making decisions. We can already see that inflation is behaving as expected. Kazaks pointed out that the current economic landscape isn’t threatening the ECB’s 2% inflation goal. This is crucial for managing prices. If conditions continue as they have, we could see the ECB easing borrowing costs slowly, though not immediately. Kazaks noted there might only be a few reductions ahead — not many — and only if the data supports it. Trade developments, especially any rising tensions or uncertainties, remain a significant risk. This isn’t just a formality; it directly influences medium-term rate expectations. Changes in trade flows, commodity prices, or trade protections could disrupt positive economic trends. If these risks materialize, any previous plans to loosen policy could face delays. We will now keep an eye on market reactions, particularly in yields and short-term futures. Traders are adjusting to the reality that smaller cuts might come later than anticipated or in fewer numbers than previously expected. Given that Kazaks held a similar cautious tone earlier this month, we view his stance as thoughtful and likely shared by others on the Council. The message is one of patience. In the coming weeks, we should be cautious and prepared. The June Governing Council meeting will be a key date for us, not because we expect major changes, but due to the significance of the language used. The tone in the post-meeting statements could quickly shift market sentiment. We will need to respond not just to the decisions made, but also to the wording, emphasis, and any caveats presented. It’s crucial to pay attention to mentions of the “terminal rate” and any references to external risks. Even a small change in language could sway sentiment for some time. So, we remain attentive — not stagnant but not hasty either. Each new data point must be gauged against previous guidance. Monitoring German inflation and eurozone wage growth — both vital for the ECB’s projections — will help us refine expectations. Lower-than-expected figures in either area could increase the likelihood of easing later in 2024. Additionally, we will watch for comments from Council members who might prefer a firmer stance. If momentum grows around the idea that keeping rates steady is safer until the second half of the year, it’s better to recognize that shift early rather than late.

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