The European Central Bank's (ECB) Governing Council member, Klaas Knot, has suggested that the market might be underestimating the probability of an interest rate increase in the upcoming meeting on September 13-14. The Dutch central bank chief's comments have led to a rise in the euro and a fall in bonds as investors anticipate a continuation of the ECB's aggressive monetary tightening.
Knot, in an interview in Amsterdam on Wednesday, highlighted his commitment to reaching the ECB's 2% inflation target by the end of 2025. He expressed discomfort with any development that would push this deadline further out, but wouldn't mind if it was achieved earlier.
The council member also discussed the importance of wage growth deceleration in achieving this inflation target. He voiced concerns about current wage agreements, stating they are significantly off longer-run compatibility with a 2% inflation target plus half a percent productivity growth.
Knot's remarks came just hours before the week-long quiet period preceding the ECB meeting, providing some of the final clues about the possible outcomes. He acknowledged that markets are struggling and assured there would be a decision at the end of this struggle.
The possibility of another quarter-point increase has been signaled by governors from Germany, Belgium, Austria, and Latvia. However, their counterparts from Italy and Portugal have underscored that economic risks are starting to play out. Bank of France head Francois Villeroy de Galhau said Wednesday that they are close or very close to the high point of interest rates.
ECB President Christine Lagarde has not committed either way but stated that inflation is too high and decisions will be based on relevant data. Knot added that while tightening is still a possibility, it is not a certainty.
This comes as labor markets have proved resilient, real incomes are beginning to recover and there are signs the housing market has bottomed out. Despite these positive indicators, Knot cautioned against too much pessimism and clarified they're discussing economic weakness rather than an outright recession.
Knot believes that roll-offs can continue even when the ECB eventually starts cutting rates — provided the process is well underway. Despite changes in inflation outlook since December 2021, when commitments were made for reinvestments under the ECB’s pandemic program through end-2024, Knot does not think they should incur the cost of reneging on earlier guidance.
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