Current Degree of Tightening Not Enough, More Rate Hikes Needed, ECB’s Knot Says

7 June 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – European Central Bank Governing Council member Klaas Knot called for further ECB rate hikes on Wednesday, saying that the current degree of tightening was insufficient.

In a statement to the Dutch Standing Parliamentary Committee for Finance, Knot, who heads De Nederlandsche Bank, said that markets were optimistic, which posed risks to financial stability.

‘Inflation may well remain too high for a long time, requiring further rate hikes’, he said, adding, ‘I am not yet convinced that the current degree of tightening is sufficient.’

‘Financial markets are optimistic: they are assuming that inflation will fall quickly and are already pricing in rate cuts for next year’, he noted. There was ‘a greater risk of new market stress’ if ‘monetary policy has to be tightened further – or for longer – than is currently expected’.

ECB tightening had ‘immediately translated into higher market rates, but this impact has yet to feed through to the real economy’, he said. Financial institutions were ‘in the middle of the adjustment process.’

Issues in the financial sector might take time to unfold following rate hikes, he said: ‘[H]istory has shown that after a rapid cycle of monetary tightening, problems in the financial sector often only emerge with a time lag’.