Central bank still needs at least two “significant” rate hikes
Frankfurt According to Klaas Knot, the head of the Dutch central bank, the European Central Bank (ECB) still needs at least two major interest rate hikes before it reaches an interest rate level that will neither boost nor slow down the economy.
The ECB’s interest rates are still well below this so-called neutral interest rate level, Knot told Bloomberg TV on Wednesday. Interest rates are therefore still driving the economy. “We must end this stimulus-stimulating monetary policy,” he said.
However, no one knows exactly where the neutral interest rate level is. “We need at least two more significant increases before we get roughly in the range of plausible estimates for neutral,” he said.
Economists are currently assuming that the neutral interest rate level for the deposit rate, currently the most important interest rate for the financial markets, is between 1.5 and 2.0 percent. The ECB last raised the rate in an unusually strong step by 0.75 percentage points to 0.75 percent in September. The next ECB interest rate meeting is scheduled for October 27th.
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High inflation won’t go away with just a bit of an economic slowdown, Knot said. “It will require continued effort on our part.” How the US Federal Reserve is dealing with the issue of reducing its bond holdings – known in the professional world as quantitative tightening (QT) – is an example for the ECB.
“I think a process like QT should be predictable, it should be gradual, it should even be a bit boring,” he noted. The US Federal Reserve was quite successful. At their recent meeting in Cyprus, the monetary authorities of the ECB spoke for the first time about reducing their balance sheet, which had swollen to almost nine trillion euros as a result of years of bond purchases.
More: Different views in the ECB on the monetary policy course