In order to combat soaring prices, the ECB raised interest rates by a whopping 75 basis points at its most recent two sessions. However, a number of central bank governors, some of whom typically support higher rates, have been open for a slower rate hike
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ECB says price growth to ease to 2% in 2024
Although the ECB projects that price appreciation would moderate to less than the 2% goal in 2024 from over five times that level now, the head of the Dutch central bank stated that threats to the forecast are completely skewed to the positive.
In Europe, we have to prepare ourselves for a protracted period in which policymakers and central bankers will have to be on it and focus on restoring price stability.
However, he added that any discussion on over-tightening could be “a bit of a joke.”
The focus now is on if the ECB would choose a third rate hike when it convenes in mid-December after hawks such as Knot forced consecutive 75 basis point rate hikes. Despite the possibility of a slowdown in price inflation this month, others argue that the risk of a recession for the 19-country euro-zone economy justifies a pause in the rate of increases.
Knot warns about declaring the fight against inflation won too soon
According to Knot, a downturn is not a “foregone conclusion,” but weaker growth is undoubtedly expected.
To bring inflation back to target we will need a protracted period of time at which at least growth is below potential because otherwise we will never get the disinflation going. My worry is still inflation, inflation, inflation.
In Knot’s opinion, the main danger is to declare victory against inflation too soon and ease off on tightening monetary policy before the work is finished. His Estonian counterpart Madis Muller cautioned about this problem on Friday.
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