ECB’s Knot: Must Continue Hiking Interest Rates for as Long as Necessary
6 June 2023
By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Klaas Knot on Tuesday said that the ECB would need to keep raising rates as long as necessary.
In a speech at the 5th Capital Markets Seminar in Luxembourg, Knot, who heads De Nederlandsche Bank, said that despite the decrease of euro area inflation to around 6% most recently, ‘this is still way too high.’
‘But I do believe that, in the absence of further supply shocks, the worst is behind us in terms of the immediate assault on our citizens’ purchasing power’, he continued.
The persistence of elevated inflation had led however to a build-up of underlying pressure, he said. ‘As a consequence, we now observe second-round effects – energy prices have found their way into other items in the consumer basket, and wages and services in particular have taken over the inflation torch’, he said.
These sources of price pressures would probably resist efforts at suppression, he said. Still, inflation expectations remained ‘decently anchored’, and it was ‘reassuring to see the first signs of recent monetary policy actually being transmitted to the real economy’, he said.
‘Central bankers will have to continue tightening monetary policy for as long as necessary, until we see inflation return to our 2% target over the medium term’, he said. ‘But we will do this step by step. Because the tighter monetary policy gets, the more forceful its transmission to output and prices that is still largely in the pipeline.’
The financial system would have to adapt to each new rise in official borrowing costs, he said, and its ability to do so smoothly could not be assumed.
‘An abrupt change in monetary policy requires a massive adjustment in the financial system, which could also trigger some of the vulnerabilities that have accumulated in the past’, he said.