The head of the Dutch central bank believes that further large interest rate hikes are necessary in the fight against inflation.
(Photo: Reuters)
Frankfurt According to Klaas Knot, the head of the Dutch central bank, the European Central Bank (ECB) would respond to a further rise in inflation, which has already risen sharply, by raising interest rates sharply. Knot looks at the so-called core inflation, in which fluctuating energy and food prices are eliminated. “If it continues to rise, we will further intensify and there will be several rate hikes of 50 basis points,” the ECB Governing Council member told Dutch radio station BNR on Friday.
Core inflation in the euro area climbed to 4.4 percent in May, and the general inflation rate to 8.1 percent. This means that inflation is now four times higher than the ECB’s target of two percent. Like many other central banks, it considers this mark to be optimal for the economy.
Inflation: The ECB needs to raise interest rates by two percentage points
Knot believes rate hikes of 2.0 percentage points will be needed over the next few months. “Then we’ll have to see if that’s enough to bring inflation back to two percent in the medium to long term.” If that’s not enough, interest rates will have to rise further. It will take time for the first two percentage points of interest rate steps to be reached. “I don’t expect that we’ll be there until early 2023,” Knot said.
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After a decade of ultra-loose monetary policy, the ECB has meanwhile initiated a change of course due to the sustained surge in inflation. It wants to raise the most important interest rates in July by 0.25 percentage points. That would be the first rate hike in eleven years.
An even larger step is planned for September. There are already voices from the central bank that an increase of 0.50 percentage points could then be necessary.
More: Japan’s central bank remains true to its monetary policy