Fri. May 20th, 2022

Klaas Knot has become the first member of the European Central Bank governing council to say publicly it should raise interest rates this year, warning that eurozone inflation will stay at 4 per cent for most of this year.

The Dutch central bank governor called for the ECB to end its net bond purchases “as soon as possible” in preparation for raising interest rates in the fourth quarter, which would be the first time it has done so in over a decade.

His comments, in an interview with Dutch television program Buitenhof, came only days after ECB President Christine Lagarde refused to rule out raising interest rates this year, signaling that next month it could accelerate plans to end net bond purchases.

Until last week, the ECB had dismissed the chances of a rate rise this year as “highly unlikely”.

In response to Lagarde’s comments, markets last week shifted to pricing in half a percentage point of rate increases by the end of this year, Bloomberg data on trading in money markets show. Such moves would lift the central bank’s deposit rate to zero for the first time since 2014.

“Personally I expect our first rate increase to take place around the fourth quarter of this year,” Knot said. “Normally we would raise rates by a quarter percentage point, I have no reason to expect we would take a different step.”

The Dutch central bank governor, one of the more conservative “hawks” among the 25 ECB governing council members, said he thought a second rate rise would follow early next year.

“At the moment we still have our foot on the accelerator,” said Knot, referring to the ECB’s bond-buying which has amassed € 2.2tn of assets since the pandemic hit almost two years ago. “We have to end that as soon as possible. That’s just adding fuel to the fire. ”

In December, the ECB agreed a “step-by-step” reduction of its asset purchases down to € 20bn a month from October but did not set an end date.

Since then, eurozone inflation has defied expectations that it would fade this year by climbing to a fresh record of 5.1 per cent in January.

In response, Lagarde said there had been “unanimous concern around the governing council table about the impact of inflation”.

Higher than expected inflation has also led the US Federal Reserve and the Bank of England to shift to more “hawkish” policy stances. The BoE raised its main policy rate to 0.5 per cent on Thursday, less than two months after increasing it to 0.25 per cent, while investors are pricing in five rate rises by the Fed this year.

Lagarde said last week the ECB would stick to the “sequence” it had already agreed of only raising rates after it stopped net bond purchases, adding that the council would be “gradual in whatever we do” and “not be rushed into anything”. Knot seemed to agree, saying: “Before you step on the brake pedal, you must first take your foot off the accelerator.”

Since last week’s ECB meeting signaled a likely “hawkish” shift in policy, analysts have brought forward the timing of when they expect it to start raising rates, with many predicting one or two such moves by December.

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