ECB’s Kazaks Signals 'Clear-Cut' Case for Rate Cut as Eurozone Growth Slows

Martins Kazaks, a key ECB policymaker, indicated a strong case for a rate cut at the upcoming October meeting, citing slowing growth and a potential tipping point for the eurozone economy. With inflation nearing the ECB’s 2% target, Kazaks stressed the importance of addressing growth risks.

Investors Expect October ECB Rate Cut as Growth Slows and Wage Pressures Ease, Says Kazaks

Martins Kazaks, an ECB policymaker, told Reuters that the euro zone's economy may be approaching a critical juncture, which presents a "clear-cut" rationale for reducing interest rates at the upcoming meeting.

Investors have entirely factored in a reduction for the ECB's October 17 meeting, following inflation and growth data below expectations and the increasingly explicit messaging from ECB policymakers, including President Christine Lagarde.

Kazaks, the governor of Latvia's central bank, observed that wage growth had decreased and profit margins had contracted, even though an economic recovery was still elusive in most of the eurozone. This created a "clear-cut" case for a rate reduction this month.

"I very much agree with the market pricing that the decision in October will be very clear," Kazaks said in an interview in Riga. "Of course I'm not going to pre-judge the decision today, but it's very clear-cut and in my view the risks to growth are important and need to be addressed."

ECB’s Kazaks Warns of Potential Economic “Snowball Effect” as Growth Declines, Calls for Caution

In June and September, the European Central Bank (ECB) reduced rates after two years of combating inflation, concluding that inflation was finally approaching its 2% objective. According to Monday's data, it was 1.8% in September.

However, growth has also declined, particularly in Germany, the manufacturing hub of the eurozone.

The Kazaks were concerned that the likelihood of a recovery would diminish, which could lead to a snowball effect that would further dampen development as eurozone companies begin to reduce their workforce.

"If corporates start to shed labour, this snowball may start rolling," he said. "I would be very cautious about this tipping-point risk."

He stated that the ECB's deposit rate, which was 3.25% then, would continue to be at a level restricting economic activity, even after a 25-basis-point reduction. This should assist in reducing inflation in the services sector.

Conversely, he did not perceive a necessity to alter the tempo and reduce rates more significantly, as the ECB can implement additional measures.