ECB’s Knot: Next Week’s Decision up in the Air; Some Good Signs on Inflation Front

6 September 2023

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Klaas Knot on Wednesday said that a September interest rate hike was possible but not certain, and that there were some positive signs with respect to inflation.

In an interview with Bloomberg, Knot, who heads De Nederlandsche Bank, called it ‘too early to tell [what next week’s decision will be]. It’s going to be a close call.’

‘There’s no longer the automaticity which was there before the summer – that each time we arrived in Frankfurt, we had some unfinished business and therefore, there was an automatic expectation that we would hike’, he said. ‘That’s no longer the case. We’ve reached the finessing phase of the tightening cycle. Tightening – a further hike – is still a possibility, but not a certainty.’

Markets may have been too willing to discount a hike, he agreed when questioned. This was ‘also a reflection of the genuine uncertainty there is’, he said. ‘The markets are struggling. They’re probably going through a similar struggle we will have to go through next week. But I can assure you at the end of the struggle, there will be a decision.’

The updated inflation projections would likely not change much, he said, whilst those for growth would be weaker.

‘While there are still important inflation risks, at the same time indicators of underlying inflation seem to have plateaued, services inflation is easing a bit’, he said. ‘Through base effects, one can expect core inflation to come down significantly in the fall. So there are some green shoots there.’

Still, he indicated that another hike would be playing it safe in his view.

‘I look at the June projections thinking we’re roughly on target at the end of 2025’, he said. ‘I won’t argue about 2.1%, 2% or 1.9%. I would clearly be uncomfortable with any development that would shift that deadline even further out. And I wouldn’t mind so much if it shifted forward a little bit given that we’ve had elevated and well above target inflation already since the middle of 2021.’

The probability of inflation surprising to the upside was now ‘pretty well balanced’ with the likelihood of a downside surprise, he said.