ECB’s Knot: Central Banks Need to Discuss Monetary Policy Transparently

12 April 2024

By Aurėja Bobelytė – VILNIUS (Econostream) – Central banks should be transparent about monetary policy and its impact on price stability, European Central Bank Governing Council member Klass Knot said on Friday.

Speaking at a workshop organised by De Nederlandsche Bank, which he heads, Knot said, according to a text provided, ‘Transparency should be a guiding principle for central banks. They should be prepared to discuss their monetary policy decisions and clearly explain how their decisions safeguard price stability, and also not shy away from considering any link with public finances and the real economy.’

The potential impact of central banks' decisions on their balance sheets should be discussed, and if QE were ever needed again, it should be pursued with transparency, he said.

‘They [central banks] should clearly communicate the benefits of QE for price stability, for liquidity in the financial system, and for the economic welfare of society – and they should also proactively communicate about the impact these purchases might have on their balance sheets’, he said.

According to Knot, given that central banks were not expected to return to their pre-QE balance sheets soon, they would face heightened financial risks for a while.

During the transition to a normalised monetary policy, it was important to consider aspects of the ECB’s operational framework review, strategy review, and risk and income-sharing mechanisms, as these could help to normalise central bank capital adequacy, he said.

‘[A]s the profitability of new, riskier monetary policy tools has proved to be lower than the profitability of traditional instruments, central banks should critically assess their capital levels’, he said. ‘They should be forward-looking and build up their capital accordingly.’

Recent crises challenged central banks' ability to safeguard price stability, he said, and looking forward, it was important to imagine ‘extreme but possible’ scenarios.

‘And this scenario analysis can guide us in maintaining sufficient buffers in terms of capital and provisions, and hence mitigate the impact on our balance sheets, and strengthen our resilience in case of a future crisis’, he said.