Attempts to fine-tune ECB policy could create undue volatility, Kazimir says

FRANKFURT (Reuters) -Euro zone inflation risks are balanced and the European Central Bank should not try to fine-tune its policy because adjusting for minor deviations could itself cause market volatility, ECB policymaker Peter Kazimir said on Monday. 

The ECB left rates unchanged for the third meeting in a row on Thursday and repeated its mantra that policy was in a "good place", a hint taken by investors to mean that policy could be unchanged for some time to come. 

"We should not try to overengineer our policy and fine-tune inflation dynamics to perfection with small moves," Kazimir, an outspoken policy hawk, wrote in a blog post. "In trying to be overly precise, the central bank could itself become a source of volatility rather than the pillar of stability our economy needs."

He argued that the ECB should not worry too much about small deviations from its 2% inflation target, especially because risks are broadly balanced.

Inflation looks set to dip below 2% next year, mostly on energy base effects, before a return to target in subsequent years. But some policymakers are worried that firms may lower their own inflation expectations during this dip, entrenching low price growth and making undershooting self-fulfilling.

Kazimir, however, argued that it would be a mistake to ignore upside risks, especially as recent underlying price growth figures have been a bit higher than forecast, as has wage data.

"We must recognise the presence of lingering upside risks," Kazimir said. 

The ECB itself did not offer a new risk assessment last week but ECB chief Christine Lagarde argued that some of the largest downside risks to growth have receded given the trade deals reached with the U.S. by some of the world's largest economies and the ceasefire in Gaza.

Financial investors see virtually no chance of a rate cut in December but still see a roughly 40% chance of a cut by mid-2026.

"Data-dependent means keeping all options open," Kazimir said. "It means our next move — when it comes — could, in principle, be in either direction, depending on the signals we receive."

(Reporting by Balazs Koranyi; Editing by Hugh Lawson)