European Central Bank Governing Council member Klaas Knot said monetary tightening beyond next week’s meeting is anything but guaranteed — suggesting officials could soon pause their unprecedented campaign of interest-rate hikes.
“For July I think it is a necessity, for anything beyond July it would at most be a possibility but by no means a certainty,” the traditionally hawkish Dutch central bank head told Bloomberg TV. “From July onward I think we have to carefully watch what the data tells us on the distribution of risks surrounding the baseline.”
The remarks signal that market and analyst expectations for two more quarter-point increases in the deposit rate, to 4%, may be overblown. Government bonds extended gains and traders pared rate-hike bets after Knot spoke. The yield on 10-year German securities fell as much as 7 basis points to 2.41%, a two-week low.
“The market has been too convinced of a terminal rate of 4% after the June meeting and is now starting to realise that there is considerable uncertainty for September,” said Theophile Legrand, a strategist at Natixis. “If the hawks also start to talk about uncertainty, the terminal rate at 3.75% is a real possibility.”
This month’s policy announcement from the ECB may contain more clues on where borrowing costs are headed. While some members of the Governing Council have said hikes may need to persist into the fall to bring down underlying inflation, others worry about the 20-nation euro-zone economy, which is battling to exit recession.
The situation is not dissimilar in the US, where the Federal Reserve is also expected to lift rates next week, though moves after that are less certain. The task for the Bank of England is clearer with inflation overshooting estimates. Markets even see the potential for a 50 basis-point rate move at the next meeting in August.
In the euro area, headline inflation has been retreating, but underlying pressures have proved stubborn. Knot said the latter measure may now be leveling out.
“It looks as if underlying inflation has plateaued,” he said Tuesday in Gandhinagar, India, where he’s attending a meeting of Group of Twenty finance chiefs. “But in the coming months we would then want to see a bit more decisive evidence on it actively coming down.”
Also speaking to Bloomberg in India, Bank of Italy Governor Ignazio Visco — a more dovish voice who’s urged caution on further rate hikes — said price gains may come down more quickly than the ECB projected last month.
Knot called the view that inflation may ease to the 2% target in 2024, rather than 2025 as the ECB currently forecasts, “optimistic.”
Echoing comments Monday from fellow hawk Joachim Nagel, who heads Germany’s Bundesbank, Knot stressed that it’s “impossible to say” how to vote after next week as there are a lot of relevant data points still to come.
“So far we’ve mainly been preoccupied with the risk of inflation persistence,” he said. “But it is of course true the more and more hikes you get our of door so to speak, this balance of risks is gradually shifting and also the risks of perhaps doing too much needs to be paid more attention to.”
--With assistance from Constantine Courcoulas and James Hirai.
(Updates with more comments from Knot in seventh paragraph.)
