ECB’s Knot: Economy Has Recovered More Strongly Than Expected, High Inflation Temporary

11 October 2021

By David Barwick – FRANKFURT (Econostream) – The economic rebound has outdone expectations and currently higher inflation is mostly transitory, European Central Bank Governing Council member Klaas Knot said Monday.

In presenting the bi-annual financial stability report of the Dutch National Bank, which he heads, Knot said that the economy had ‘recovered strongly from the blow we were dealt by the pandemic’, called the recovery ‘actually stronger than we expected’ and noted that ‘estimates both in the Netherlands and worldwide have in many cases recently been revised upwards.’

The pandemic could still conceivably resurge, but even in such a case, he was ‘still reasonably optimistic’, he said. ‘The economic impact of new waves will be lessened considerably as the economy has to an increasing extent adapted.’

A wave of insolvencies was not expected, he said; even if some businesses ‘still run into difficulties’, most are ‘essentially healthy.’

‘I'm optimistic about the economic recovery, although I am less positive about the build-up of financial vulnerabilities and risks’, he said. The economic improvement reduces awareness of mounting vulnerabilities, he said.

Knot said elevated inflation was probably a ‘largely temporary’ development. ‘Nonetheless, from the perspective of healthy risk management, it is also important to take other scenarios into consideration’, he said.

The lesson of the 1970s is that ‘we do not have an unlimited capacity for envisaging how temporary inflation is’, he said. ‘If financial markets fail to take sufficient account of scenarios involving persistently high inflation and its accompanying interest rate environment, it could lead to shock price falls in the future.’