ECB on track but must hold off on rate-cut commitment, says Kazimir

Feb 28 (Reuters) – The European Central Bank will acknowledge an improved inflation outlook when it meets next week but it must avoid any commitment to an interest rate cut and should hold off on any such step until June, Peter Kazimir, Slovakia’s central bank chief said.

The ECB has kept rates at a record high since September but with inflation now quickly retreating, policymakers are debating when to start unwinding some of the 10 hikes that took the deposit rate from deep in negative territory to 4% in just over a year.

Once interest rates start falling, the ECB should keep going at evenly paced increments for a steady cycle of policy easing, Kazimir, who sits on the ECB’s rate-setting Governing Council, told Reuters in an interview on Wednesday.

“There is no reason to rush a rate cut,” Kazimir, a former finance minister said. “June would be my preferred date, April would surprise me and March is a no go.”

“The timeline is important because I would prefer a smooth and steady cycle of policy easing and for that, we have to be pretty sure about the first step,” Kazimir, an outspoken conservative, added.

Although the ECB has not officially hinted at any date, Greece’s Yannis Stournaras, an outspoken policy dove, has also put June on the table, suggesting a consensus may be forming around that date.

The ECB has in the past given commitments to certain moves but policymakers should avoid such “forward guidance” this time, Kazimir argued, saying they must learn from their past mistake of tying their own hands too far in advance.

Still, inflation is clearly falling quicker than the ECB had projected in the past, even if some questions about wages and underlying price trends remain.

“Disinflation is going much quicker than we expected on the headline level but we can’t be certain yet about core inflation because wage developments remain unclear,” Kazimir said. “For that, the outcome of collective bargaining deals will be crucial. All in all, we are on the right track but we’re not yet there.”

Investors now expect the ECB to cut rates by just 90 basis points this year with a first move in June, a big swing in market pricing compared with last month when up to 150 basis points of easing was priced in.

Kazimir said he was pleased with this swing in sentiment as pricing is now “more realistic”, a comment that echoes other policymakers who said investors were getting ahead of themselves and their excessive bets were likely to be proven wrong.

High interest rates have weighed on economic growth as investment dropped and construction activity dried up, and the euro zone is now in its sixth straight quarter of broadly stagnant growth.

Its misfortunes are exacerbated by weak demand from China and high energy costs, which have both dragged industry into recession.

But Kazimir said his base case was for a soft landing, or the defeat of inflation without inducing a recession – often considered the holy grail of central banking.

“Economic growth has been disappointing but we should not overestimate the impact of monetary policy,” Kazimir said. “Europe is falling behind in competitiveness and the political will is lacking to move forward with structural reforms… low interest rates won’t save us from these pains.”

With regard to the ECB’s ongoing review of its operational framework, Kazimir said his two main aims were to resurrect the interbank funding market and to limit the size of any structural portfolio of bonds and loans the ECB may hold.

Reporting by Balazs Koranyi; Editing by Hugh Lawson

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