ECB's Knot urges 'significant' steps at next two policy meetings

The European Central Bank should take “significant steps” at its next two interest-rate meetings, according to Governing Council member Klaas Knot, who’s part of a hawkish group that’s raising expectations of a second straight three-quarter-point hike in October.

The Dutch central bank chief said the ECB must finish the “normalization” of borrowing costs before it can turn its attention to discussing how to shrink the trillions of euros of bonds it purchased during recent crises -- a process known as quantitative tightening.

“We need at least two” more “significant rate hikes,” Knot said Monday at a financial-stability presentation in Amsterdam. He doesn’t expect QT to start before 2023.

Since it began lifting rates in July for the first time in more than a decade, the ECB has enacted 125 basis points of hikes, with markets leaning toward another 75 basis-point move on Oct. 27. At the same time, however, Europe’s economic prospects are worsening. Record inflation and cuts to Russian energy supplies make a recession increasingly likely.

That deteriorating backdrop has prompted some of the more-dovish members of the ECB’s Governing Council to warn against going too far. 

While Portugal’s Mario Centeno called normalizing monetary policy “absolutely necessary and desirable,” he said decisions should be “gradual, and be guided by flexibility and by proportionality.”

“Untimely reactions are susceptible to becoming an over-reaction,” Centeno said Monday in Lisbon.

Spain’s Pablo Hernandez de Cos later reiterated that the pace of ECB normalization will hinge on economic data, saying in a presentation to university students that rates will be raised until inflation eases toward the 2% goal.

Consumer-price growth is far quicker in parts of the 19-nation euro zone than others, however -- topping 25% in the Baltic region at the extreme, compared with 10% for the bloc as a whole. 

In the Netherlands, it’s exceeded 17% and may remain elevated for longer than financial markets and economists currently foresee, according to the central bank’s latest financial-stability report, published Monday.

“The ECB will continue to raise interest rates until there’s once again a credible prospect of a return to the stability target of 2% inflation in the medium term,” Knot said.