ECB’s Knot: Interest Rates to Go Beyond Neutral, to Discuss 2023 Balance Sheet Reduction
24 November 2022
By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Klaas Knot on Thursday said that official interest rates would exceed neutrality and that the Council would next month discuss the reduction in 2023 of the ECB’s balance sheet.
In remarks at a meeting with a Dutch parliamentary committee, Knot, who heads De Nederlandsche Bank, said that ‘[m]onetary policy is expected to tighten even more in the coming months, thus raising interest rates further beyond neutral levels.’
‘The ECB will continue to tighten its policy until the medium-term outlook for inflation – a broader concept than just model projections – returns to target’, he said. However, interest rates are not everything, he said, ‘and in December we will discuss the scale-down of the bond portfolio that we plan to start next year.’
Knot reminded that the ECB’s Transmission Protection Instrument (TPI) was available to ensure policy transmission by temporarily buying bonds again if markets become disorderly and fiscal policy complies with conditions.
There was ‘great uncertainty’ about how inflation would evolve, he said. ‘The profound influence of energy prices means that the central bank has difficulty controlling current inflation’, he said, citing wage developments and fiscal policy as upside risks.
The Dutch economy could face negative growth in the quarters to come, he said.
‘Some cooling off of the economy is needed to reduce inflationary pressures’, he said. ‘However, it is far from certain that a mild recession will be enough to curb high inflation.’