The European Central Bank may need to deliver another half-point interest-rate increase after a planned hike of that size at next month’s meeting, according to Governing Council member Klaas Knot.
(Bloomberg) — The European Central Bank may need to deliver another half-point interest-rate increase after a planned hike of that size at next month’s meeting, according to Governing Council member Klaas Knot.
Officials still have “quite some ground to cover” in beating back inflation to their 2% target from more than four times that now, the hawkish Dutch central-bank chief said Wednesday.
“I consider it highly unlikely that the March hike will be our endpoint,” Knot said in a webcast organized by MNI Market News. “And if underlying inflation pressures do not materially abate, maintaining the current pace of hikes into May could well remain warranted.”
Knot is among officials pushing back against suggestions that a recent slowdown in inflation means the ECB’s job is almost done. Policymakers lifted the deposit rate by a half-point to 2.5% last week and said they intend to make an identical step next month.
Even as the Federal Reserve slows the pace of its own hikes, ECB officials want to remain tough while underlying price gains are stuck at a record.
Executive Board member Isabel Schnabel said Tuesday that the unprecedented monetary tightening to date has had little effect on inflation. Bundesbank President Joachim Nagel warned the same day not to underestimate the challenge posed by soaring prices, telling German newspaper Boersen-Zeitung that more “significant” rate increases will be required.
Knot said that the further rates move into restrictive territory, “the more important it becomes to fine-tune our actions.”
“Once we see a clear and decisive turn in underlying inflation dynamics, I therefore expect us to move to smaller steps,” he said. “But absent such a turn, the ECB will continue to stay the course on its steady pace upwards, in pursuit of price stability.”
On the economy, Knot said the euro area is now likely to dodge a winter recession, but increased economic activity could improve the bargaining position of workers and contribute to more inflationary pressure down the road.
While he noted that monetary-policy transmission is starting to show up in bank-lending and housing data, he said the bigger risk for the ECB remains doing too little, not too much.
(Updates with more comments from Knot starting in last two paragraphs.)
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