ECB’s Knot: Could Hike Rates in Early 2023

30 December 2021

By David Barwick – FRANKFURT (Econostream) – The European Central Bank could hike rates in early 2023, ECB Governing Council member Klaas Knot said Thursday.

In an interview with Dutch daily newspaper Trouw, Knot, who heads De Nederlandsche Bank, said that much depended on what transpired in the interim, but that most of his fellow Council members were probably thinking the same way.

‘I would say that new virus variants will indeed increase the current problems rather than slow down inflation’, he said. ‘After all, the demand for products and services remains largely unchanged while there are problems on the supply side. Then you can get more inflation.’

It was nonetheless ‘almost certain’ that inflation rates would moderate in 2022, he said, given the transient nature of current drivers of high inflation.

‘I do take a slightly different view from some others in Frankfurt’, he said. Whereas the latest staff forecasts call for HICP of 1.8% in 2023, ‘[p]ersonally, I think it is just as likely that we will remain above 2%. Not far above 2%, but still. It was my input to the ECB meeting on 16 December.’

Omicron could leave inflation even higher, he said, ‘but for now I'm assuming that Omicron has little effect on inflation.’ Should inflation wind up higher, ‘[t]hen we will have to accelerate the exit from this loose monetary policy’, he said.

‘In any case, all the switches are already set to to end the remaining purchase programme at the end of next year’, he said. ‘And once that winding down is complete, the policy rate could go up in early 2023.’

As to whether other Council members have this time frame in mind, ‘that remains to be seen, but I think so’, he said. ‘A lot depends on how the economy develops next year - a year is a very long time.’

Knot took issue with the distributional effects of current ultra-accommodative monetary policy. ‘An interest rate increase is always good for savers, bad for borrowers. When interest rates are lowered, it works the other way round’, he said. ‘But extreme policies, such as those implemented over the past seven years, have more extreme distributional effects.’