Dutch central bank chief Klaas Knot remarked on Tuesday that underlying price pressures in the euro zone might prove challenging to control, but the effectiveness of monetary policy is becoming evident, emphasizing the need for gradual rate hikes. Over the past year, the European Central Bank (ECB) has raised rates by a significant 375 basis points to combat inflationary pressures. While investors anticipate at least two more rate hikes, the tightening cycle, the swiftest in the bank’s quarter-century history, is nearing its conclusion.
Dutch Central Bank Chief Highlights Effectiveness of Monetary Policy and Caution in Further Rate Hikes
Knot stated in a speech, “Because inflation was high for a long period, underlying inflationary pressures have built up. It is likely that price pressures in these areas will prove more difficult to bring down.” The recent decrease in underlying inflation, which excludes fuel and food prices, to 5.3% from 5.6% last month, does not provide clear evidence of core price growth peaking, as cautioned by ECB chief Christine Lagarde.
Nevertheless, Knot expressed cautious optimism, noting that Europe’s worst inflation issues are subsiding, long-term expectations are reasonably anchored, and there is growing evidence of the effectiveness of ECB policy. Knot, known for his hawkish stance, stated, “It is reassuring to see the first signs of recent monetary policy actually being transmitted to the real economy.” The impact of the policy is evident in rising borrowing costs for firms and households, along with macro indicators such as the decline in house prices.
“These are only the first, concrete steps in the transmission of our monetary policy tightening,” Knot emphasized. “And we have yet to see their full effect.” While Knot did not reiterate his call for rate hikes in June and July, he affirmed that the ECB would continue raising rates until inflation returns to the 2% target over the medium term. However, caution is necessary in further steps, as the higher rates climb, the more impactful they become, considering the previous moves have yet to demonstrate their full effect.
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Additionally, Knot highlighted the importance of maintaining stability within the financial system as it adjusts to higher rates. The ECB needs to be mindful of stability considerations alongside its rate hike decisions. As the euro zone grapples with core inflation and the effects of monetary policy, the central bank must navigate the path forward with prudence.
Amidst ongoing concerns about stubborn core inflation in the euro zone, Dutch central bank chief Klaas Knot emphasized that the effectiveness of the European Central Bank’s (ECB) monetary policy is gradually becoming evident. While price pressures in certain areas may prove challenging to bring down, Knot urged for a cautious approach to further rate hikes. The ECB has implemented an aggressive tightening cycle, raising rates by a total of 375 basis points over the past year to combat inflationary pressures. However, the fastest tightening cycle in the bank’s history is now approaching its end.
During his speech, Knot highlighted the accumulated underlying inflationary pressures resulting from a prolonged period of high inflation. He explained, “It is likely that price pressures in these areas will prove more difficult to tame.” Although underlying inflation decreased to 5.3% from 5.6% last month, ECB chief Christine Lagarde cautioned that core price growth has not yet shown signs of peaking.
Despite these challenges, Knot expressed cautious optimism, suggesting that Europe’s most severe inflation issues are behind it. He noted that longer-term inflation expectations remain reasonably anchored, providing some reassurance. Knot further remarked that the first signs of recent monetary policy measures are beginning to impact the real economy. This is evident in rising borrowing costs for firms and households, as well as observable macro indicators such as the decline in house prices.
Knot emphasized that these initial steps in the transmission of the ECB’s monetary policy tightening are just the beginning, with the full effects yet to be seen. While he refrained from reiterating his call for rate hikes in June and July, Knot reiterated the ECB’s commitment to raising rates until inflation returns to its 2% target over the medium term. However, he stressed the need for caution as rates continue to rise, recognizing that the impact of previous rate adjustments has not fully materialized.
Furthermore, Knot emphasized the importance of maintaining stability within the financial system as it adapts to higher rates. The ECB must carefully consider stability considerations alongside its decisions on rate hikes. As the euro zone grapples with core inflation and the effects of monetary policy, the central bank must proceed with prudence and vigilance.
Conclusion
Looking ahead, the market will closely monitor upcoming ECB communications, economic data, and central bank decisions for further insights into the future trajectory of interest rates and the euro zone’s inflation outlook. The balance between addressing stubborn core inflation and ensuring stable economic growth remains a delicate task for the ECB, requiring careful adjustments and close monitoring of market developments.