ECB’s Knot: ‘Strong Case for Using Projection Meetings to Recalibrate Our Policy Stance’

20 June 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Governing Council member Klaas Knot on Thursday said that given the high uncertainty surrounding current inflation drivers, it would be better for the ECB to decide on interest rates cuts at meetings with new projections.

Speaking at the Forum Analysis in Milan, Knot, who heads De Nederlandsche Bank, said, according to a text provided, ‘Since the current outlook allows us to reduce rates at a gradual pace, there is a strong case for using projection meetings to recalibrate our policy stance, as these meetings allow us to update our assessment based on a richer set of information.’

The information available by the June Governing Council meeting supported the first interest rate cut, he said, adding that following the data-dependent and meeting-by-meeting approach would make it possible to continue to ‘slowly but surely, lift our foot off the break.’

‘This way of conducting monetary policy can be summarised in one short sentence: wait for incoming data, including new projections, and then decide accordingly’, he said.

The uptick in May inflation was a reminder that the disinflation process was bumpy and that there would still be fluctuations at least until the end of the year, he said.

Monetary policy decisions should facilitate the materialisation of projections, rather than trying to shift the inflation in a certain direction, he said.

Uncertainties made forecasting inflation and calibrating monetary policy challenging, he said, noting that the ECB was faced with an unprecedent situation.

‘For one thing, despite 25 years of institutional history, we have little experience with a gradual easing of monetary policy following a tightening cycle’, he said.

The interest rate path priced by markets, with three cuts this year, was in line with optimal policy scenarios, showing that markets understood the ECB’s reaction function, he said.

‘Market expectations of the ECB’s rate path have shifted around over the past weeks, reflecting incoming data, but are currently broadly in line with the market pricing at the time of our projections’, he said.