ECB’s Knot: ‘Safe to Say We Are Very, Very Close to “Mission Accomplished”’
30 December 2021
By David Barwick – FRANKFURT (Econostream) – The European Central Bank is within reach of price stability and with risks to inflation obviously tilted upwards, policy tightening is more likely than further accommodation, Governing Council member Klaas Knot said Thursday.
In an interview with German business daily Börsen-Zeitung, Knot, who heads De Nederlandsche Bank, said that ‘it is safe to say we are very, very close to “mission accomplished”. The risks to inflation are clearly tilted to the upside, and I believe our forward guidance no longer has to be an obstacle for us to raise rates if we wanted to.’
‘We stand ready to adjust our instruments in either direction’, he was quoted as saying. ‘And the risks to inflation are clearly on the upside. The combination of these two observations suggest that future policy tightening is more likely than renewed easing.’
The ECB is ‘now taking our foot off the “gaspedal” and for me it is crystal clear that the general level of euro area bond yields will gradually rise’ which is ‘also desirable in view of the inflation trend’, he said. ‘But we must avoid an excessive widening of interest rate spreads that would have a differential impact on different parts of the euro area.’
Governments must adjust, he said, which should be possible provided the increase in borrowing costs is gradual.
‘We have so far ruled out a rate hike based on the current outlook. If new data change something about the outlook, we can react at any time’, he said. ‘We meet every six weeks, and every six weeks we can adjust our language, which would have an immediate impact on market expectations for lift-off. My baseline still excludes 2022 but not 2023.’
The possibility that upside inflation risks would force the ECB to readjust more quickly makes it ‘even more important that we start early’, he said. ‘The last thing you want in such a situation is to fall behind the curve. Once you fall behind the curve, it takes an abrupt, shock-wise correction to get back ahead of it. We must not fall behind the curve under any circumstances.’
Monetary authorities must and will see to it that a wage-price spiral does not take hold, he said. ‘There should not be the slightest doubt about that’, he added.
Knot defended the traditional sequencing of policy withdrawal, arguing that the negative consequences of asset purchases were greater and that the ECB should avoid flattening the slope of the yield curve more than it must.
Moreover, flexibility in buying sovereign debt was the principal way of avoiding fragmentation, ‘a necessary precondition for monetary policy normalisation’, he said. ‘Preparing for gradual monetary policy normalisation is appropriate now. But it will not succeed if accompanied by recurrent bouts of turbulence in bond markets.’
The December policy meeting of the Governing Council was ‘a turning point for me’, he said, accompanied as it was by ‘the first projections on the basis of which we could no longer confidently say that medium-term inflation will indeed fall below 2%.’
However, high uncertainty made him ‘a little cautious to cry victory’, he said. ‘There is too much uncertainty to respond head over heels now. Uncertainty calls for gradualism. That is why I supported the decisions in mid-December.’
‘I am comfortable with a scenario where we use 2022 to gradually unwind bond purchases’, he continued. ‘We will reduce the purchases from €80 billion a month to €20 billion from October 2022. €20 billion creates the option for us to end the net purchases in one step at any time. This would leave our hands completely free in 2023. But if inflation continues to surprise on the upside also into 2022, we can end the bond purchases sooner and move market expectations of the first rate hike further forward.’
The Omicron variant of the coronavirus ‘may slow and delay the economic recovery, but it will not derail it’, he said. ‘And for us as the ECB, what Omicron means for inflation is even more important. The likelihood that Omicron will increase inflation is at least as high as the likelihood that the variant will reduce inflation.’