European Central Bank Governing Council member Klaas Knot reckons officials will probably need to hike interest rates in May, but he can’t yet judge on how big a move that should be.
(Bloomberg) — European Central Bank Governing Council member Klaas Knot reckons officials will probably need to hike interest rates in May, but he can’t yet judge on how big a move that should be.
The Dutch central-bank chief, briefing reporters in Amsterdam on Thursday, spoke one week after he and colleagues delivered a half-point increase in the face of financial turmoil that had engulfed Credit Suisse Group AG in neighboring Switzerland.
“Without this episode, the risks to the inflation outlook were so strongly tilted to the upside that I would have been very convinced that we need to make another step in May,” he said. “I still think that we need to make another step in May, but I don’t know the size of that.”
That judgment will be affected by the lingering impact of the recent turmoil on financing conditions, said Knot, who is one of the hawks on the Governing Council. Before the turbulence, he had previously suggested a half-point rate hike would be necessary at the May meeting.
“One of the factors that will go into that position is how much sort of extra tightening we are already getting from this risk aversion,” he said. “How big that effect is going to be, nobody can say because we don’t know how long-lasting this sort of risk aversion in the markets will be. Luckily, our next meeting is only six, seven weeks away from now, so we still have time.”
Knot expanded on that theme in an interview with Dutch newspaper FD also released on Thursday.
“If this nervousness is long-lasting, yes, it will have an impact on our rate path,” he was cited as saying. “Even then, I am not yet ready to say, the ECB will no longer be able to raise interest rates. I still believe that without this tension we still had so much to do.”
With the fog starting to clear after the recent market turbulence, hawkish policy makers are starting to wonder aloud whether the ECB can resume hiking in due course. Knot’s German colleague Joachim Nagel said on Wednesday that “our job is not done yet” and that if inflation turns out as forecast, more rate hikes will be needed.
(Updates with FD interview in seventh paragraph. A previous version of this story was corrected to specify inflation in third paragraph)
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