Martins Kazaks, Latvian central bank governor and ECB Governing Council member, discussed interest rates with CNBC. He remarked that rates might be near their peak, but uncertainties could alter the policy outlook.

Kazaks mentioned that the current scenario aligns with the ECB’s 2% inflation target. He suggested that if this scenario continues, rates are almost at the terminal level, with a possibility of a few more cuts.

Economic Data And Trade Discussions

Incoming economic data will guide future decisions, as Kazaks noted the significance of developments in trade discussions. He stressed the need to observe these factors before taking further action.

Three weeks prior, Kazaks shared a similar stance, advising caution on additional rate cuts by the ECB. The ECB Governing Council’s next meeting is scheduled for June 4 and 5.

Kazaks’s comments underscore a broader stance now quietly forming within the policymaking ranks — the idea that, although rate increases appear to be off the table for now, there’s no great rush to unwind them either. What this suggests concretely is that monetary policy is reaching a breather, unless altered by fresh challenges. From what we gather, policymakers are carefully trying to digest the stream of indicators before nudging any further.

We can start by acknowledging what has already been made visible: inflation appears to be cooperating. Kazaks pointed out that the present economic backdrop, for the moment, doesn’t threaten the 2% inflation aim set out by the ECB. That matters specifically for how pricing is approached. If economic conditions continue to align with current projections, we can infer that the ECB is in a position to ease borrowing costs gradually, though not quickly. Kazaks implied there might only be a few more reductions — not many — and only if supported by consistent data.

Trade Developments And Policy Adjustments

Trade developments, particularly where tensions or uncertainties might flare, are clearly still a key risk on their radar. That’s not just lip service. It filters directly into medium-term rate expectations. Changes in import/export flows, commodity pricing, or protections on goods could disrupt otherwise smooth progress. If those risks materialise, any earlier moves to loosen policy could be delayed.

What we’re watching now are reactions — from both yields and short-term futures — as traders recalibrate to a reality in which smaller cuts arrive later than hoped, or fewer than previously priced in. Considering Kazaks floated a similarly measured tone earlier this month, we’re inclined to regard his position as a structured one, likely echoed by some others within the Council. Patience is the message.

Our approach over the next few weeks should reflect both caution and preparedness. June’s Governing Council meeting now sits as a pinpoint in our immediate timeline, not because we expect sweeping changes, but because the language will matter most. The tone in post-meeting commentary could shift sentiment quite quickly, and that’s what we will have to react to — not just the outcome, but the choice of words, the emphasis, the caveats.

Paying attention to the phrasing around “terminal rate” or references to external risks will be paramount. A small change in structure or emphasis may tilt sentiment one way or the other for decent stretches of time.

So we remain positioned, not static but not impulsive. Every new data point has to be weighed against previous guidance. Watching German inflation and eurozone wage growth — both key inputs for the ECB’s projections — will help refine expectations. Lower-than-expected figures in either could amplify expectations for easing later in 2024.

That said, we will also monitor any talks from members inclined to take a slightly firmer view. If momentum grows around the idea that holding rates flat is safer until the second half of the year, it’s better to be early in acknowledging that shift than late.

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