European Central Bank Governing Council member Klaas Knot said monetary tightening beyond next week’s meeting is anything but guaranteed — suggesting officials could soon pause their unprecedented campaign of interest-rate hikes.
(Bloomberg) — European Central Bank Governing Council member Klaas Knot said monetary tightening beyond next week’s meeting is anything but guaranteed — suggesting officials could soon pause their unprecedented campaign of interest-rate hikes.
“For July I think it is a necessity, for anything beyond July it would at most be a possibility but by no means a certainty,” the traditionally hawkish Dutch central bank head told Bloomberg TV. “From July onward I think we have to carefully watch what the data tells us on the distribution of risks surrounding the baseline.”
The remarks signal that market and analyst expectations for two more quarter-point increases in the deposit rate, to 4%, may be overblown. Government bonds extended gains, and the euro retreated from the strongest level against the dollar in almost one and a half years, as traders pared rate-hike bets after Knot spoke.
The yield on 10-year German securities fell as much as 7 basis points to 2.41%, a two-week low. The common currency was trading little changed at $1.1243 as of 10:05 a.m. in London, after rising as much as 0.4% earlier in the session.
“The market has been too convinced of a terminal rate of 4% after the June meeting and is now starting to realise that there is considerable uncertainty for September,” said Theophile Legrand, a strategist at Natixis. “If the hawks also start to talk about uncertainty, the terminal rate at 3.75% is a real possibility.”
This month’s policy announcement from the ECB may contain more clues on where borrowing costs are headed. While some members of the Governing Council have said hikes may need to persist into the fall to bring down underlying inflation, others worry about the 20-nation euro-zone economy, which is battling to exit recession.
What Bloomberg Economics Says…
“Knot wants to see decisive evidence that underlying inflation is coming down. We see signs of progress on some measures, but this is unlikely to be reflected in the core reading before the September policy meeting. Combined with concerns over the strength of wage growth, a terminal rate of 4% still looks most likely.”
—Jamie Rush, Chief European Economist
The situation is not dissimilar in the US, where the Federal Reserve is also expected to lift rates next week, though moves after that are less certain. The task for the Bank of England is clearer with inflation overshooting estimates. Markets even see the potential for a 50 basis-point rate move at the next meeting in August.
In the euro area, headline inflation has been retreating, but underlying pressures have proved stubborn. Knot said the latter measure may now be leveling out.
“It looks as if underlying inflation has plateaued,” he said Tuesday in Gandhinagar, India, where he’s attending a meeting of Group of Twenty finance chiefs. “But in the coming months we would then want to see a bit more decisive evidence on it actively coming down.”
Also speaking to Bloomberg in India, Bank of Italy Governor Ignazio Visco — a more dovish voice who’s urged caution on further rate hikes — said price gains may come down more quickly than the ECB projected last month.
Knot called the view that inflation may ease to the 2% target in 2024, rather than 2025 as the ECB currently forecasts, “optimistic.”
One question is how quickly the effects of the tightening enacted during the past year is feeding through to the economy. Bank of France Governor Francois Villeroy de Galhau said Tuesday that patience may be needed in awaiting that impact.
“I’m completely confident that monetary-policy transmission is happening, but it’s probably happening a bit more slowly than at other times,” he said in Paris.
Echoing comments Monday from fellow hawk Joachim Nagel, who heads Germany’s Bundesbank, Knot stressed that it’s “impossible to say” how to vote after next week as there are a lot of relevant data points still to come.
“So far we’ve mainly been preoccupied with the risk of inflation persistence,” he said. “But it is of course true the more and more hikes you get our of door so to speak, this balance of risks is gradually shifting and also the risks of perhaps doing too much needs to be paid more attention to.”
–With assistance from Constantine Courcoulas, James Hirai and William Horobin.
(Updates with markets, Bloomberg Economics, Villeroy starting in third paragraph.)
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