ECB’s Knot: Disinflation Relatively Painless, Thanks to Our Credibility
31 January 2025

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Klaas Knot on Thursday said that disinflation in the euro area had been fairly unproblematic in large part due to the ECB’s credibility.
Speaking at the first Klaas Knot Lecture on international economic policy, initiated by the University of Groningen in The Netherlands, Knot, who heads De Nederlandsche Bank, noted ‘the fact that the current disinflation process is proceeding relatively painlessly – without a major economic downturn or any meaningful rise in unemployment’, unlike the 1970s.
‘I think the difference here is the result of decades of building central bank credibility and anchoring expectations’, he said.
That credibility, along with anchored expectations, made possible a gradual approach to countering high inflation, he said.
‘In a sense, it allowed to postpone reaching the target from the often prescribed medium-term of around two years to around four years now’, he said. ‘This flexibility allowed for a “soft landing”, or a return to target without completely choking the euro area economy.’
Knot argued that the ECB needed to retain all the instruments at its disposal, despite each one’s disadvantages, because it couldn’t be ruled out that their deployment would at some point become appropriate.
Forward guidance, he said, became a liability when the ECB was obliged to move quickly to deal with high inflation. This however did not imply that it should never be used again, he said.
‘There can still be many circumstances in which there is added value in clarifying the intentions of the central bank based on current information’, he explained. ‘However, going forward, in explaining our reaction function, we should emphasize that a changing environment can lead to a change in policy response.’
Asset purchases should also remain an option, he said, but should be subject to careful cost-benefit analysis. ‘My personal preference in such cases would be to employ QE forcefully when needed to avoid deflationary risks, but to avoid using it overly persistently, as I believe the balance of benefits and costs to shift over time’, he said.