DNB boss expects lower interest rates, critical of union's demand for shorter work week

Klaas Knot, the president of De Nederlandsche Bank, expects that the European Central Bank will continue to lower interest rates but that inflation in the Netherlands will remain higher than the EU average for a time yet. He also thinks that trade union FNV’s plan for a shorter work week is “exactly the wrong measure at this time,” Knot told Nieuwsuur.

The European interest rate will fall below 3 percent in the coming years, Knot expects. The ECB recently lowered the deposit interest rate from 3.75 to 3.5 percent. “I expect that we will gradually take our foot off the brake in the first half of 2025 by further lowering the interest rate,” Knot told the current affairs program. "I do not expect interest rates to return to the extremely low levels we saw before the pandemic, but to a more natural level." He expects them to land “somewhere starting with a two.”

The high interest rate in recent years is due to Russia’s invasion of Ukraine in February 2022. That kicked off the energy crisis and sparked high inflation in Europe. The ECB increased the interest rates to 4 percent, attempting to cool the economy and bring prices under control by making it more difficult to borrow money. But since inflation has been falling toward the target of 2 percent this year, the ECB has slowly been lowering the rates again.

Inflation in the Netherlands was 3.3 percent in August, higher than the European average. “Inflation in the Netherlands is increasingly starting to deviate from the European pattern, and not in a positive way,” Knot said. According to him, that is because the Netherlands is a service economy. “The service sector is very labor-intensive, so inflation is mainly determined by wage costs.”

The labor market remains tight, and wages continue to rise. Trade union FNV is demanding a 7 percent wage increase for next year, Knot pointed out. “If wages do indeed increase by 7 percent, that will add a full percentage point to inflation in 2026. That means that your and my shopping basket will continue to rise in price for even longer. The parties at the collective labor agreement table must take that into account.”

He also said that FNV’s plan to push for a 32-hour working week in collective agreements is “exactly the wrong measure at this time” because it will only further increase the labor shortage. “People who work should be encouraged to work more hours,” he said.