ECB’s Kazaks Says October Rate Cut Would Need Economic Slump

(Bloomberg) -- A slump in the euro-zone economy would be required for the European Central Bank to lower interest rates at its meeting next month, according to Governing Council member Martins Kazaks.

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“The probability of a rate cut in October, if we look at the financial markets, isn’t big,” the Latvian official said in a podcast. But “if there’s an unexpected hit to the economy, and if the economy feels significantly weaker than is currently expected and inflation also significantly declines, then of course we could also consider a rate cut.”

The remarks come a day after the ECB cut its deposit rate by 25 basis points to 3.5%. Money markets are betting on another reduction in December, with the chances of an October move at 20% — down from about 40% earlier this week. People familiar with the situation said the door isn’t fully closed to next month, but action then is unlikely.

Inflation isn’t fully defeated due to increases in services prices remaining stubbornly high, Kazaks said Friday. The economy, though, is expanding slower than anticipated — possibly due to tight monetary policy.

“It’s absolutely justified the decision to step by step start to lower these rates,” he said. “Already this year we’ve had two moves and of course this year is not over.”

Kazaks also said:

• “Wage growth is now significantly higher than inflation is rising. That means the public has more money, and at some point this money has to begin to be spent and that will help the economy grow more strongly”

• NOTE: ECB Officials Stick With Call for Gradual Cuts in Rates

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