Dutch central bank leader Knot expects smaller ECB interest rate increases

The interest rate hikes announced by the European Central Bank (ECB) will be smaller in the near future, said Klaas Knot, president of the Dutch central bank (DNB). He expressed this expectation during a speech at a European Banking Congress in Frankfurt. Knot said the ECB is entering a new phase with a new strategy to bring down high inflation.

“Looking forward, I expect us to reach broadly neutral territory at next month’s policy meeting. At that moment, we are no longer stimulating economic growth, but we are also not yet slowing it down. Neutral territory is like halftime in a football game, when coaches gather all their players around a white board and draw the game plan for the second half. The team that comes back on the field might then play in a different way, for example more tiki-taka than continued kick-and-rush,” Knox said.

Knot also used a comparison with the football field regarding the unprecedented interest rate steps of 0.75 percentage points in recent months. “Looking back, we did not know exactly where monetary policy was headed, but we were sure that we had to leave accommodative territory as soon as possible. In football terms, our tactics reflected some sort of kick-and-rush spirit, with rate hikes of 50bps and 75bps reflecting the desire to front-load our action and reach a more neutral stance of our policy rates as soon as possible,” he said.

However, now Knot expects the approach to be different. “As we head into the second half, our game plan is likely to change from long shots on target to short passes and agile moves. So, it will become more likely that we slow the pace of interest rate increases, which also enables us to use the full palette of our instruments making our tactics more varied.”

At the same time, Knot continues to emphasize that the unprecedented high inflation must be curbed quickly. If this is not the case, he said he believes it will only become more expensive to get the price level down. This year inflation in the euro countries is expected to average 8.5 percent. That will rise to 11.6 percent in the Netherlands.

“For a long time, inflation was hardly on anyone’s mind. But today, inflation has returned with a vengeance and has become a key issue for everyone. Three years ago, in 2019, headline inflation in the euro area stood at a seemingly unshakable 1 percent. A year later, it even dipped below zero,” he said on Friday. “And yesterday, for the first time in its history, Eurostat reported double-digit headline inflation of 10.6 percent, and even more worrisome from our perspective, core inflation (excluding energy, food, alcohol & tobacco) reached an all-time high at 5.0 percent.”

Earlier this week, the Bloomberg news agency said sources told its reporters that ECB policymakers would aim for a rate hike of 0.5 percentage point next month.