ECB Not Yet Done Hiking, and Won’t Cut This Year, Knot Says
9 April 2023
By Xavier D’Arcy – FRANKFURT (Econostream) – European Central Bank Governing Council member Klaas Knot said on Sunday that it was almost completely excluded that Eurozone policymakers could decide to cut rates this year.
In an interview with Dutch newspaper NRC Handelsblad, Knot, who heads the Dutch central bank, said that the ECB was certainly not yet done hiking rates, and that the only question facing policymakers was whether to hike by 50bp or 25bp.
A 2023 rate cut from the ECB was ‘almost impossible’, he said, adding that the ECB ‘may well have to hold interest rates at peak level for a long time.’
‘We are certainly not done with interest rate hikes yet’, he said. ‘The only question is whether you still need to take a further step up of half a percentage point, like the last few times we raised interest rates, or can already scale back to smaller steps of a quarter of a percentage point.’
He had not yet made up his mind on whether 50bp or 25bp would be appropriate at next month’s ECB meeting, he said, with ‘still a lot of economic data coming out until then.’
‘[F]or us central bankers, it is still too early to cheer, because core inflation, excluding energy and food, is not yet shrinking’, he said. ‘We should not be lulled to sleep by falling overall inflation, because that is largely the effect of falling energy prices.’
The ECB could ‘only sit back when a really meaningful downward trend becomes visible in underlying inflation’, he said. Projections were a less useful guide for monetary policy at the current moment because they are ‘surrounded by even more uncertainties than usual’, he said. ‘Right now, we need to pay more attention to the underlying trends in current inflation.’
The 350bp of ECB rate hikes so far would take ‘about a year and a half to start acting on inflation’, he said: ‘So we are going to see the dampening effect of that on inflation in the second half of this year.’
Financial stress could mean the ECB ‘would have to do less’, he said. A tightening of financing conditions due to banking turmoil ‘would be an argument for us to move to smaller interest rate steps.’
Part of inflation in Europe came ‘from excess demand for goods and services in the economy’, with government stimulus and loose monetary policy playing a role, he said.
Central banks ‘have learnt that lesson and have turned their tack with lightning speed. But on the fiscal side, too little is still happening’, he said. He called for governments to move to tighter fiscal policy: ‘Following monetary policy, fiscal policy has yet to make a retreat.’