ECB should raise interest rates by 50 bps in February and March, official says

Further policy tightening expected as underlying inflation continues to rise, says Dutch central bank chief Klaas Knot

President of the Dutch central bank Klaas Knot at the World Economic Forum last week. EPA

The European Central Bank should continue with half-point interest-rate increases at the next two meetings and the time to slow the pace of hikes is “still far away”, according to governing council member Klaas Knot.

“We made a step down in December from 75 to 50 basis points — that will be the pace for a multiple number of meetings,” he told La Stampa in an interview.

“So that means at least the two in February and March.

“I do think that we will continue to be in tightening mode until the summer.”

Later in the year might “be a time in which we could make a further step down from 50 to 25 basis points", Mr Knot said.

“But we are still far away from that. I want to re-emphasise that this is not in sight for the upcoming meetings.”

The hawkish Dutch central bank chief already made the case for continued ECB tightening last week, arguing that underlying inflation was still rising, even as the headline measure slowed.

Speaking in a separate WNL interview on Sunday, Mr Knot repeated that message, saying “something will follow in May and June” without specifying what size of rate increases he envisioned.

Officials last year raised the deposit rate by 250 basis points to 2 per cent and economists in a Bloomberg survey see them peaking at 3.25 per cent by summer.

Still, some officials consider slowing the pace of tightening as price pressures ease and energy costs drop, according to sources familiar with their thinking.

“In the December data, we saw a first decline in headline inflation, but that was entirely due to base effects and lower energy inflation,” Mr Knot said.

“We focus on core inflation where, unfortunately, there is no good news. Because it is still on the rise. Underlying inflationary pressures show no signs of abating yet.”

He is not alone in his pushback against taking the foot off the gas too quickly.

ECB president Christine Lagarde told the World Economic Forum in Davos that policymakers would “stay the course,” and the central bank chiefs of Austria and Finland made a similar case in recent days.

“At this moment, the risk that we have to manage is the risk that we do too little, not too much,” Mr Knot said.

Turning to quantitative tightening, which is set to start in March, Mr Knot said he expected the “impact to be limited which would allow us to gradually increase the €15 billion ($16.3 billion) to ultimately €26 billion".

This would imply a complete halt of reinvestment for the ECB’s asset purchase programme, he added.

“I also think we should go there cautiously and gradually, because we have never done it before,” the Dutch governor said.