ECB Insight: Knot’s Thinking on Lift-Off Takes a Hawkish Turn

7 February 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Klaas Knot’s Sunday interview revealed a clear and hawkish shift in his thinking that apparently took place over a relatively short period of time.

Knot, who heads De Nederlandsche Bank, said on Dutch television programme Buitenhof in widely reported remarks, ‘I personally think that our first interest rate increase will take place around the fourth quarter.’

As he later in the interview stated more categorically that he expected the first hike ‘this year’ and presumably wasn’t thinking of an even earlier lift-off than 4Q, the suppression of the qualification ‘around’ in many reports of his comments is pardonable.

That said, Knot may have been thinking of ECB President Christine Lagarde, who last Thursday sought to explain away a related, overly specific prediction she had made last year and since regretted by claiming it had been, ‘as all pledges of that nature, conditional.’

Taking no chances, Knot thus added that his prognosis was ‘an estimate that is constantly subject to change, and if new information comes to light, then of course I will adjust my estimate accordingly.’

Still, there is no overlooking the change in his assessment. In an interview with German business daily Börsen-Zeitung on December 30 – not quite six weeks before yesterday’s comments – Knot said of lift-off that his ‘baseline still excludes 2022 but not 2023.’

This is not to say that Knot, who is at the hawkish extreme of Econostream’s ranking of ECB Governing Council members, was not already last year looking forward eagerly to a fundamental change in ECB policy that he considered just around the corner.

‘[I]t is safe to say we are very, very close to “mission accomplished”’, he also told Börsen-Zeitung.

On Sunday, he all but pronounced the mission accomplished, and it was evident that concern about persistently high inflation was behind this.

Whereas in December Knot had professed merely that he was ‘one of those who are not entirely convinced that inflation will fall below 2% again’ and had still felt comfortable asserting that ‘if you look at the composition of inflation now, we are confident that inflation will ease in 2022’, no such assurances were forthcoming yesterday.

‘I now believe … that at least for most of this year, inflation in the euro area will remain above 4%’, he said Sunday. That would also have ‘a spill-over effect into next year, so we now think that all in all, increased inflation will last at least two years in total, measured from last summer, if not longer. … That is definitely not good news.’

Knot also appeared to pour water on an idea supported by fellow hawk Austrian National Bank Governor Robert Holzmann, namely an inversion of the usual sequencing of policy withdrawal.

‘[B]efore you can, say, put your foot on the brake pedal, you first have to take your foot off the accelerator, and that brake pedal, I call the policy interest rate hike’, Knot said. ‘We currently have our foot on the accelerator, that is our bond purchase programme, which we must end as soon as possible because that is just fuel on the fire.’

Knot is doubtless one of those Holzmann had in mind on January 24, when the Austrian governor said that policy sequencing inversion ‘was actually rejected by my closer colleagues in the Council’.

The Dutch central banker appeared to be perfectly willing to content himself for now with just enough tightening to get (nominal) interest rates out of their current, strongly disliked negative territory, saying that ‘if we do not get a wage-price spiral, and if inflation expectations indeed remain well anchored around our 2% target, then there is not so much reason for us to raise interest rates quickly and sharply.’

The Eurozone is not the US, ‘where inflation is of domestic origin, where the wage-price spiral is also already taking place’, he said.