ECB’s Knot Sees at Least Two Further 25BP Hikes Over Summer

26 May 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – The European Central Bank needs at least two more 25bp hikes at its next two meetings, and perhaps more thereafter, Governing Council member Klaas Knot said on Friday.

In an interview with various major European newspapers, Knot, who heads De Nederlandsche Bank, said that rates would have to remain at peak levels for a very long period of time and that the market was being too optimistic regarding the timing of rate cuts.

‘I do believe that we will need further interest rate increases in June and July, […] I expect our analysis to conclude that at least two more 0.25 percentage point interest rate increases will be necessary’, he said. ‘As for what happens after the summer, I am completely open.’

Once the ECB had reached the terminal rate, it was likely to stay at that level for a ‘significant period’, he said. Markets, which expect rate cuts first quarter of 2024, were being ‘too optimistic’. The general understanding in the Governing Council was that the terminal rate would be reached ‘at a not-too-distant point in time’, he said.

‘We see that core inflation is more persistent than we expected. And from experience, once inflation has reached wages and services, it becomes even more persistent’, he said. ‘It's challenging to put the genie back in the bottle.’

Core inflation was the ECB’s ‘biggest concern’ and there were ‘no signs of a decline yet, especially not in the services sector’, he said. The ECB needed ‘to be certain that we can observe a significant decline in core inflation.’

Regarding the transmission of monetary policy, he said he believed ‘that most of the effects of the previous monetary tightening are still in the pipeline – we have only seen a very preliminary impact.’ So far, the influence had only been felt on financing conditions, ‘but the consequences for growth and inflation are still ahead of us’, he said.

As a whole the Eurozone was ‘facing a period of low to moderate growth’, though no recession, in his opinion.

The decline in real estate prices in the Eurozone was a ‘normalisation’ and as such ‘a welcome correction’, he said. These developments would ‘make homeownership more accessible, especially for younger couples’, he said.

Eurozone governments needed ‘to generate higher primary surpluses in their budgets to mitigate the increased interest burden’, he said. Governments ‘do not have unlimited time’, he warned, saying budgetary adjustments should take place ‘in this and the next year, at least.’