FRANKFURT, March 3 - The European Central Bank should "sit tight" and keep its policy rate unchanged for now as the fallout from the war in Iran remains unclear, Latvian central bank governor Martins Kazaks told Reuters on Tuesday.
Traders have begun to factor in a possibility of an ECB rate increase later this year after recent disruptions to oil and gas shipments from the Gulf and related trade bottlenecks raised the prospect of higher inflation across the euro area. Kazaks said, however, that the conflict could simultaneously depress activity, leaving the ECB with conflicting signals.
"We should sit tight," he said in a phone interview, and added that the bank may present scenarios at its next policy meeting on March 18-19 about how the war could affect the economy. "But I dont see that we need to rush to do something with policy rates," Kazaks said.
Money market pricing has shifted in recent days. Investors are assigning around a 40% chance of an ECB rate hike by the end of the year after Februarys higher-than-expected inflation print, according to market measures. Only a week earlier markets were pricing in a potential cut.
Kazaks said the recent inflation reading would leave policymakers "in a cautious mood" and provide a higher starting point from which any energy-driven shock could build. Still, he downplayed the likelihood of imminent tightening.
"Current rates are appropriate based on what I am seeing," he said. "Markets were pricing in a cut not so long ago. Its within the high uncertainty interval, I see no need to rush."
At the same time, Kazaks emphasised that the ECB should be ready to move policy in either direction depending on how inflation evolves. He said decisions would hinge 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."
He framed the situation as one of opposing forces. "At the end of the day there are opposing forces coming from this shock and it depends on which one is stronger," Kazaks said, underscoring the uncertainty facing the bank.
The Latvian governors comments come as market participants reassess rate trajectories amid fresh price pressures tied to energy market strains and trade interruptions. Kazaks indicated the ECB will not pre-emptively alter its stance while the balance of risks between inflation and growth remains unclear, preferring to let additional data and scenario analysis inform any decision at the upcoming policy meeting.
Context supplied in Kazaks remarks emphasises two critical trade-offs for euro zone policy: the risk that energy and trade shocks push inflation higher versus the risk that the same shocks weigh on economic activity. His recommendation to pause underscores a preference for data dependence rather than pre-emptive action while uncertainty is elevated.