ECB will act with ‘cool head’ on market volatility, Kazaks says

The ECB will have to make sure that countering so-called fragmentation in markets doesn’t undermine its main goal of battling inflation, currently four times its 2% goal. Picture: Alex Kraus/Bloomberg

The European Central Bank is ready to combat unwarranted financial-market moves but must also be prepared to look through turbulence as it exits negative interest rates, Governing Council member Martins Kazaks said.

“If action is going to be necessary, we will be on top of it,” Kazaks, the Latvian central bank governor, said in an interview in Riga. “It is natural to see some increased uncertainty and volatility. We need to live through this situation with a cool head and steady hand showing to the market, what’s our direction.” 

Kazaks spoke after an emergency meeting last week where ECB officials accelerated work on a tool to defend the integrity of the euro region. Policy makers were forced to act following a blowout of Italian bond yields in the wake of a decision revealing plans for tightening in coming months.

“This is in a way natural to see increased volatility after years of monetary policy not raising the rates,” Kazaks said. Still, “the market should not be carried away with the speed of re-pricing and jumping to much higher interest-rate levels.” 

Until the tool is presented, officials will deploy reinvestments under a 1.7 trillion-euro ($1.8 trillion) purchase program to smooth out tensions reminiscent of the debt crisis that bedeviled the currency bloc several years ago.

Italian bonds held gains alongside German counterparts on Monday, leaving the 10-year spread little changed at 194 basis points.

People familiar with the matter have said the new measure should be ready for the ECB’s next Governing Council meeting on July 20-21. Kazaks sought to play down any particular deadline, saying officials can act sooner if they have to.

“I don’t think that a specific date is that important here,” Kazaks said. “It’s about market volatility, will it require for us to move in earlier, we will do earlier. If it’s not that urgent then we will not rush.” 

Picking the right time to step in will be tricky however. While fundamental differences between European economies justify different levels of borrowing costs, “a set of variables” could help determine the right time to act, Kazaks said.

“For instance, it’s stress levels in the markets, it’s the speed of adjustment,” he said. “I would say that currently the problem is the speed.”

The ECB will have to make sure that countering so-called fragmentation in markets doesn’t undermine its main goal of battling inflation, currently four times its 2% goal. Problems with transmission of monetary policy in any one euro-area country “shouldn’t undermine” decisions on the overall stance, Kazaks said.

“Separate instruments can be necessary to address both of those issues,” he said.

Earlier this month, the ECB said it will join peers around the world in raising rates in July and exit subzero monetary policy by the end of September. While the first move will be a quarter-point hike, the following one could be double that magnitude, it said.

Kazaks insists such decisions aren’t set in stone.

“When we meet and we take the decision, we take a look at the current situation in the economy, especially so in September when we will have the new macro outlook,” he said.

Bloomberg