ECB’s Knot: Quarterly Projection Meetings Key for Interest Rate Decisions

28 May 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Governing Council member Klaas Knot on Tuesday said that interest rate decisions would benefit from the information available at the quarterly projection meetings, given the ECB's data-dependent approach.

Speaking at the Barclays-CEPR Monetary Policy Forum in London, Knot, who heads De Nederlandsche Bank, said, ‘This [regained confidence in projections], together with the fact that a lot of the relevant and comprehensive data such as that on wages, productivity and profit margins are only published on a quarterly basis, suggests to me that projection round meetings of the Governing Council will be the key meetings for our interest rate decisions.’

The continuing disinflation process and the improvement of the inflation outlook helped boost the Governing Council’s confidence in reaching price stability in a timely manner, he said, adding that it could ‘soon be appropriate to ease the currently restrictive monetary policy stance, and gradually take our foot off the brake.’

‘As a result, policy rates will slowly but gradually move to less restrictive levels’, he said. ‘The precise timing, speed and scale of easing will also follow a data-dependent approach, with our projections being a key ingredient.’

The ECB March projections were in line with market pricing and supported three or four interest rate cuts bythe end of the year, he said, though he noted that new wage data had become available since then.

‘While the incoming data on new wage agreements does indicate some moderation since late 2023, wage growth has remained elevated and – according to forward-looking indicators – the path for 2024 is still expected to be quite bumpy. Productivity growth has remained low and is yet to pick up’, he said. ‘Hence, we will have to await our next projections in June that will provide an updated assessment of the inflation outlook and the accompanying balance of risks.’

During the panel discussion, Knot added that following a data-dependent and meeting-by-meeting approach meant that ‘all meetings are, in principle, in play’.

‘[T]he amount of rate cuts, of course, is something to be determined by the Governing Council, but we do take into account what goes into the projections and where some of the projections relay relative to our 2% target and the balanced risk around it’, he said.

Asked about effect of the United States Federal Reserve’s decisions on the ECB’s, he said, ‘So if the Fed cuts less than expected, then we will get two opposing effects and we will simply have to obverse which of the two effects actually is dominating in terms of our inflation outlook. And that will have to decide what room for manoeuvre we will have in cutting rate.’

The two possible outcomes of the ECB easing monetary policy more than the Fed would be a lower exchange rate in the euro area, which would be inflationary, and an overall tightening of financing conditions with global spillovers, he said.