ECB’s Knot: ‘We Should Be a Little Patient and Not Raise Rates Too Much’

2 November 2023

By Isabel Teles – AMSTERDAM (Econostream) – European Central Bank Governing Council member Klaas Knot on Thursday said that to avoid stifling the economy, interest rates should not be excessively high.

In a speech at the Annual DNB Research Conference, a text of which was posted to the website of De Nederlandsche Bank, which he heads, Knot said that the ECB ‘should be a little patient and not raise rates too much to prevent choking off the economy.’

Monetary policy should be balanced in a way that it did not do too much or too little, he said.

‘[E]ven though inflation numbers have started to decrease, the risk still remains that high inflation may become entrenched if second round effects persist or inflation expectations de-anchor’, he said.

The effects of the monetary policy tightening on real economy would be felt between one and two years, he said, due to transmission lags.

‘To date, this quantitative tightening has been smooth and well-absorbed by financial markets’, he said with respect to the ECB's efforts to reduce the size of its balance sheet. This was one of the challenges faced by central banks around the world, he said.

‘While, clearly, the current balance sheet has to shrink, our future balance sheet size may need to be larger than it was before the global financial crisis’, he said. ‘In my view, refinancing operations represent the most efficient tool to provide such a level of reserves down the road.’