ECB certainly not finished with interest rate hikes, says Dutch central bank chief Knot

The European Central Bank is "certainly" not yet finished and will continue to raise interest rates, said Klaas Knot, the President of the Dutch central bank De Nederlandsche Bank and a member of the ECB’s Governing Council. In an interview with NRC, he said the only question that remains is how large or small the rate hikes should be.

Given a core inflation rate of 6 percent in the eurozone, a 3 percent interest rate is not currently enough, Knot said. The greatly fluctuating prices for energy, food, tobacco and alcohol do not factor into the calculation of core inflation, which the ECB focuses in on before making an interest rate decision. Core inflation is still on the rise across the European Union.

Knot does not know exactly how much the interest rate will have to rise. In recent times, the increase was a step of half a percentage point. But Knot has not yet decided if he believes a step of a quarter of a percentage point will offer enough solace. "We have to determine that during the ECB meeting in May."

In addition, Knot has “virtually excluded” the chance that interest rates will go down at the end of this year.

By raising interest rates, the central bank makes borrowing costs more expensive. People and companies will eventually spend less money as a result. In this way, the ECB hopes to curb demand in the economy and to ensure that prices do not rise too quickly.

In his interview with NRC, Knot also discussed banking security within the eurozone after the recent problems banks in Switzerland and the United States have faced. According to Knot, unlike during the credit crisis of 2008, the issue has been about interest rate risk instead of credit risk.

“Interest rate risk management is taken very seriously in Europe, often less so in the US,” said the central bank leader. He stated that in the US, only the eight largest banks are subject to strict international supervision, as opposed to the more regional banks. It was precisely two American banks from the latter category which collapsed: Silicon Valley Bank (SVB) and Signature Bank.

Rules about interest rate risk management apply to all banks operating in Europe, Knot said.