(Bloomberg) — The European Central Bank must stay nimble on interest rates, Governing Council member Klaas Knot said.
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“In this environment with significant uncertainty about the supply side of the economy, it is important keep all options open,” Knot, who heads the Dutch central bank, said on Saturday in Washington. “Retaining full optionality would act as a hedge against the materialization of risks in either direction to the growth and inflation outlook.”
Speaking at a conference organized by the Group of 30, a think tank of former and current policymakers, academics and finance executives, he said that “on inflation, it is clear that the risks surrounding the outlook have become more balanced.”
“In the short term, given the downward surprise of both headline and core inflation in the third quarter of this year, we may see inflation dropping faster than expected,” he said.
After the first back-to-back interest rate reduction last week, policymakers are openly discussing what’s next, with views increasingly diverging. While more dovish officials are urging more rapid and possibly steeper cuts, their hawkish colleagues have called for prudence and patience.
Speaking at a separate event in Washington, Bundesbank President Joachim Nagel pointed to economic data arriving in the coming weeks as guideposts for the ECB’s next policy meeting in December.
Investors and economists are anticipating a series of moves in the next few weeks, amid a faster-than-expected inflation retreat and signs that the 20-nation bloc’s economy is stagnating at best.
Knot said data point to “increasing risk of disappointing growth” in the near and medium term and added that he found the “weak domestic growth in the euro area is slightly puzzling.”
Still, macro indicators point to a soft landing in the euro zone. “We do not foresee a recession in the euro area,” he said.
Euro-area inflation in September fell below the ECB’s 2% target for the first time since 2021. While an uptick is expected in the coming months, most officials expect it to be less severe than thought in September and the 2% goal may be reached sustainably already early next year — instead of end-2025 as envisaged in September.
At the same time, the downtrend in private-sector activity in the euro-area extended into a second month in October, with little sign of a recovery to come.