Klaas Knot, president of the Dutch central bank and member of the governing council of the European Central Bank (ECB), said yesterday that he expects the ECB to raise interest rates at some point between the beginning of October and the end of the year.
In an interview on Dutch television BuitenhofMr Knot said he supported ending the eurozone central bank’s so-called quantitative easing (QE) program as quickly as possible.
“I expect our first rate increase to be around the fourth quarter of this year,” he said.
“Normally we would raise rates by a quarter of a percentage point. I have no reason to expect us to take a different step.
A second rate hike would likely follow quickly in early 2023, he predicts. After that, unless inflation continues to soar, Mr Knot said he did not expect any further increases.
He is widely seen as one of the ECB’s ‘hawks’ pushing for a rate hike to calm inflationary pressure, while the ‘doves’ – including ECB chief economist Philip Lane – have favored the continued increased support from the central bank to the markets to support growth.
On Thursday, ECB President Christine Lagarde declined to rule out an interest rate hike in 2022, even though she had previously said it was “unlikely”.
For now, the crucial ground over which the hawks and doves of the European Central Bank will be fighting is inflation.
This relates in particular to the question of whether the inflation that has surged over the past six to nine months will translate into potentially unsustainable wage increases.
In a recent briefing with journalists ahead of the latest ECB event, Central Bank of Ireland Governor Gabriel Makhlouf said officials here will seek to assess whether rising wages outpace productivity, as they consider how to respond to inflationary pressures.
At the ECB’s press conference on Thursday, Ms Lagarde insisted that, as things stand in the eurozone, the rate of wage growth is not something that officials regard as a problem.
“Wage growth remains subdued overall,” she said.
However, she also said watching higher wages and prices play out is now a key focus.
“If price pressures translate into higher-than-expected wage increases or if the economy returns to full capacity more quickly, inflation could turn out to be higher,” Ms. Lagarde said.
“Obviously, the longer this lasts, the higher the likelihood of second-round effects.”
However, unlike the Bank of England which has called for wage moderation, Ms Lagarde said she wants to see how wage dynamics play out against the backdrop of economies reopening as they emerge from the Covid-19 pandemic.
A “critical difference” between the eurozone and the UK “has to do with the labor market”, she said.
In Great Britain, there is a labor shortage. Brexit played a role in this event, while wages rose there too, she said. This is not a problem in the euro zone.
“I don’t want to take a political position but I think there was a lot of non-British labor that eventually had to leave the UK, that wasn’t fully replaced,” Ms Lagarde said. .