Kazaks Sounds Alarm on Inflation as ECB Prepares for September Showdown

A prominent member of the European Central Bank's Governing Council has sounded the alarm on inflation, warning that the ECB must act to prevent it from taking root. Martins Kazaks, Governor of the Bank of Latvia and a key figure at the ECB, described the current inflation environment as 'somewhat uncomfortable' in a recent interview with Bloomberg.

Kazaks emphasized that the ECB cannot afford to let consumer price gains linger above its 2% target, currently breached by approximately 1 percentage point. The Eurozone is experiencing an inflation rate of around 3%, prompting Kazaks to state unequivocally: 'The ECB won't hesitate to act if needed' to bring inflation back in line.

Notably, markets are already pricing in a near-certain 25-basis-point increase to the deposit rate at the upcoming September policy meeting. The economic backdrop is mixed, but Kazaks pointed out several positive factors that give the ECB room to maneuver without panicking. These include solid growth in Q2 and low unemployment rates across the bloc, as well as moderating wage growth, one of the key contributors to inflation.

The stability of inflation expectations near the 2% target is a significant factor, as Kazaks highlighted: 'When businesses and consumers start expecting permanently higher prices, they behave in ways that make those expectations self-fulfilling.' As such, the upcoming September meeting will be crucial, with investors positioning themselves around European assets and closely watching incoming data on services inflation and labor market indicators.