Several bigger hikes possible if inflation worsens, ECB’s Knot says

“Subsequently, we have to see if that’s enough to bring back inflation to 2% in the medium-to-long term,” Knot said Friday in a radio interview
Several bigger hikes possible if inflation worsens, ECB’s Knot says

Knot, an ECB hawk who was the first Governing Council member to float the idea of a hike above the usual quarter-point, said that even by moving in larger increments he doesn’t expect rates to be raised by a cumulative 200 basis points before early 2023.

European Central Bank Governing Council member Klaas Knot said several half-point increases in interest rates could be needed if inflation worsens -- indicating a possible move of that size in September may not be a one-off.

Knot, an ECB hawk who was the first Governing Council member to float the idea of a hike above the usual quarter-point, said that even by moving in larger increments he doesn’t expect rates to be raised by a cumulative 200 basis points before early 2023.

“Subsequently, we have to see if that’s enough to bring back inflation to 2% in the medium-to-long term,” the Netherlands’ central bank chief said Friday in a radio interview. “If that isn’t enough, we’ll have to increase the rate further. But it’s impossible to put a percentage on that. I can’t rule out any interest-rate percentage.”

Facing record consumer-price growth that now tops 8%, the ECB plans to lift its deposit rate -- currently -0.5% -- by a quarter-point next month and by a bigger amount at the following meeting in September. Beyond that, it’s outlined a “sustained” cycle of increases, without specifying their size.

Its peers, meanwhile, are well underway with tightening monetary policy, with the Fereal Reserve this week raising rates by 75 basis points -- the most since 1994.

Speaking earlier this week, Knot’s colleague on the Governing Council, Pierre Wunsch, called the first 150 to 200 basis points of rate increases “no-brainers” because real rates would remain negative in the short term.

As long as the ECB doesn’t see inflation “coming down, we are going to have to increase more.” While there’s no agreement on the pace of hikes after September, policy makers have shown they’re open to bigger steps, the Belgian official said.

One potential obstacle to ending years of ultra-loose monetary policy is unwarranted jumps in the government bond yields of euro-zone member states -- so-called fragmentation. Following a recent sharp selloff in Italian debt, the ECB held an emergency meeting Wednesday at which it decided to speed up work on an anti-crisis tool.

It’s important for the ECB to have an “effective” instrument to combat such market turmoil, Governing Council member Gediminas Simkus said Friday.

  • Bloomberg

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