The European Central Bank has a "clear-cut" case for cutting interest rates at its next meeting as the euro zone's economy may face a tipping point, ECB policymaker Martins Kazaks told Reuters.
Investors have fully priced in a cut for ECB's Oct 17 meeting after a streak of lower than expected inflation and growth data, as well as increasingly clear messaging from ECB policymakers including President Christine Lagarde.
Kazaks, Latvia's central bank governor, noted wage growth had come down and profit margins shrunk while an economic recovery remained elusive in large parts of the euro zone, creating a "clear-cut" case for a rate reduction this month.
"I very much agree with the market pricing that the decision in October will be very clear," Kazaks said in an interview in Riga. "Of course I'm not going to pre-judge the decision today, but it's very clear-cut and in my view the risks to growth are important and need to be addressed."
After two years fighting runaway prices, the ECB cut rates in June and September, judging inflation was finally on its way to its 2% goal. Data on Monday put it at 1.8% in September.
But growth has also weakened, particularly in the euro zone's manufacturing powerhouse Germany.
Kazaks feared that euro zone companies may start shedding workers as the prospect of a recovery evaporates, in a snowball effect that would dampen growth further.
"If corporates start to shed labour, this snowball may start rolling," he said. "I would be very cautious about this tipping-point risk."
He said that, even after a 25-basis-point cut, the ECB's rate on deposits, then at 3.25%, would remain at a level that restricts economic activity, which should help dampen inflation in the services sector.
On the other hand, he saw no need to change the pace and cut rates by a larger increment as the ECB has time to make further moves.
