ECB’s Knot: 50bp Pace Should Be Maintained for Multiple Meetings, Including February and March

22 January 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – European Central Bank Governing Council member Klaas Knot explicitly called for two 50bp rate rises at the ECB’s next two monetary policy meetings in February and March.

In an interview with Italian daily La Stampa published on Sunday, Knot, who heads De Nederlandsche Bank, said the pace of 50bp hikes should be maintained for ‘multiple’ meetings, including ‘at least’ those in February and March. He said the ECB was ‘far away’ from switching to 25bp hikes: ‘I want to re-emphasise that this is not in sight for the upcoming meetings.’

The ECB ‘will still have to raise interest rates significantly and bring them into a sufficiently restrictive territory’ to ensure inflation returns to its 2% target, he said.

He considered that the policy guidance issued by ECB President Christine Lagarde at the central bank’s press conference in December is ‘even more valid today’. Lagarde had said that policymakers expect to raise interest rates ‘at a 50bp pace for a period of time’, with available information warranting a 50bp hike in February and ‘possibly’ at the following meetings too.

The scenario of a ‘prolonged recession’ in the euro area now was unlikely, according to Knot, who did not know whether the region would ‘fully avoid a recession’ or just face ‘a shallow one’. The growth outlook for 2023 was ‘not very abundant’ and looking ‘subdued’, he said. If a recession were avoided, the consequence would be a ‘less automatic cooling down of inflationary pressures’, he said.

He warned that ‘underlying inflationary pressures show no signs of abating yet’ in the Eurozone and that recent core inflation numbers yielded ‘no good news’ for policymakers.

A wage-spiral was not in view yet, though, he said. Although wages are ‘clearly responding’ to inflation, and ‘steadily rising’ without an end in sight, firms could likely absorb such pressures via reduced profit margins, he argued.

Knot claimed to be not ‘particularly hawkish’ on quantitative tightening, calling the ECB’s decision to reduce its holdings of government bonds under the Asset Purchase Programme by €15 billion a month from March through 2Q a ‘toe in the water’.

‘I wholeheartedly support a cautious approach, because we have never done QT in history’, he said, adding that ‘we have to learn along the way’ what impact QT will have. The ultimate goal, in his view, was a ‘full stop to reinvestment’ of proceeds from the APP, though the ECB would have to get there ‘cautiously and gradually’. He said he saw ‘a lot of renewed demand for European sovereign risk’ since the ECB had raised rates back into positive territory.

Asked about the atmosphere on the Governing Council, he said that ‘there have been a few dissenting opinions here and there’ on rate hikes, but noted that these were ‘always on speed or magnitude, never on direction.’