Dutch central bank leader: No reason for ECB to quickly reduce interest rates

There is no reason for the European Central Bank (ECB) to hastily reduce interest rates, said Klaas Knot, the President of De Nederlandsche Bank, the central bank of the Netherlands. Knot is also one of the policymakers at the ECB. Based on the information currently available, the Dutch banking leader thinks that an interest rate cut by the ECB is "quite unlikely" in the first half of 2024.

He was taking into consideration many factors, including expected wage increases next year, for which there is still a great deal of uncertainty. In an interview with the German newspaper Börsen-Zeitung, Knot stated that the wages of 40 to 50 percent of European employees will be renegotiated at the beginning of the new year. He does not expect the outcome of those negotiations until mid-2024.

Knot already warned earlier this year about the consequences of higher wages, which many labor unions are trying to deliver. He warns this could lead to a wage-price spiral. This means that people with a higher salary can spend more, which further drives up prices of goods and services, resulting in higher inflation.

To curb inflation, the ECB has raised borrowing costs to a record high over the past year and a half. Last week, the central bank left interest rates unchanged for the second time in a row. This happened after inflation in the eurozone had weakened from 2.9 percent to 2.4 percent in November.

Because the ECB's inflation target of 2 percent is now within sight, investors hope that the ECB finished with rate increases, and may already be thinking about reductions in the spring.

Knot said in the interview that the decline in inflation is a "very welcome confirmation" that the ECB's interest rate policy is effective. But he also said is still too early to claim a victory.