ECB Governing Council member Kazaks: Upside risks to inflation still outweigh downside risks to the economy; policy direction is clear but there is no need to rush to raise rates.

European Central Bank Governing Council member Martins Kazaks said the ECB can afford to take some time to analyze inflation dynamics amid opposing forces in the global economy. The Latvian central bank governor said in an interview that sustained increases in oil and gas prices are expected to keep consumer price growth elevated, while the recent sell-off in government bonds could begin to weigh on economic activity. "My sense is that in the short term, inflationary forces will still prevail," said Kazaks, who was in Bangkok attending the International Monetary Fund (IMF) annual meetings. "So the policy direction is clear, even if there is no need to rush to adjust interest rates right now. We are not behind the curve in that sense, we are in a favorable position." Since the outbreak of the Iran war this year, the ECB has raised rates twice, and officials are debating what to do next. With inflation approaching 4%, some have said further tightening may be needed to return to the 2% target. Belgian central bank governor Pierre Wunsch said this week: "We will probably have to raise rates again" even amid high uncertainty. His Lithuanian counterpart Gediminas Simkus shares that view, saying recent evidence indicates a need to increase borrowing costs. Kazaks stressed that the upside risks to inflation "still outweigh the downside risks to economic growth." However, he noted that threats to economic expansion "could become more non-linear." Kazaks said that in such a complex backdrop, decision-making at the Frankfurt-based institution could become more complicated as rates breach levels estimated to be restrictive for the economy. "The monetary policy trade-offs will become trickier," he said. "So far, decisions have been relatively easy. But now uncertainty is high and visibility is very low." France's predicament Adding to the challenge is France: it has led the recent bond sell-off as the government struggles to narrow its budget deficit. Yields in other highly indebted euro area countries are also rising, fueling concerns that market moves could impede monetary policy transmission and force the ECB to intervene. "Unwarranted volatility in financial markets would be concerning, but that doesn't mean any stress in financial markets becomes our problem," Kazaks said. "There is still time to resolve fiscal issues, and I urge that it be done as soon as possible." The French government has submitted a plan to narrow the deficit and now needs to prove to nervous financial markets that it can deliver. Speculation about possible ECB intervention has been rising after the premium investors demand over equivalent German bonds rose to the highest level since the euro area crisis. But Kazaks said monetary policy should not get involved by pushing down French borrowing costs. "Treating it as a solution to all problems would be extremely short-sighted and counterproductive. Of course, monetary policy transmission is in our interest, and we will keep watching," he added. "If things become disorderly, we will do what is necessary. But we should not try to solve every possible problem." Minimum reserve requirement Kazaks also addressed a topic that has been discussed for some time the minimum reserve requirement. Raising the minimum reserve would drain liquidity from the market and help with quantitative tightening; it would also reduce central banks' interest payments, helping them offset losses accumulated from quantitative easing. "If we have a policy reason to use it, then we should use it," Kazaks said. "We will explain it clearly to the market so that our reaction function can be understood, and then it will be fine." Lithuania's Simkus said on Wednesday that "there is nothing wrong with discussing this," and that the current level is not "set in stone."