economics

ECB's Knot Urges Wait-and-See as Euro Zone Weathers Risks

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ECB's Knot Urges Wait-and-See as Euro Zone Weathers Risks

  • Changes to policy communication should wait until next year
  • Dutch governor sees value in linking rate guidance to economy
Klaas Knot. Photographer: Martin Leissl
Photographer: Martin Leissl

The European Central Bank should take time to see if the euro-area economy can overcome global stresses, according to council member Klaas Knot, who said he wants no new policy signals for months to come.

Officials intend to phase out their bond-buying program this year despite rising protectionism, Brexit uncertainties, and concerns over Italy’s public finances. The Dutch governor, one of the more hawkish members of the Governing Council, sees no reason to revisit the plans.

“We are well advised to first wait and see how these risks will actually play out, because they are downside risks, but they might not materialize, or materialize to a lesser extent than we thought,” Knot said in an interview in Bali, Indonesia, where the International Monetary Fund annual meetings are taking place this week.

“It might be best to spend the rest of 2018 quietly winding down our asset-purchase program, and then from January onward start focusing on what to do with rates.”

ECB President Mario Draghi offered his view of protectionism on Friday, saying that the euro area’s performance is “not independent of the global growth momentum,” and “openness is crucial.”

Concerns in the Governing Council were highlighted this week in the account of its September meeting. Officials said there was a case for characterizing the risks to growth as “tilted to the downside” -- the current language is “broadly balanced” -- before deciding to hold back from raising the alarm.

The view was corroborated by Bundesbank President Jens Weidmann on Friday, who said slower euro-area growth was not a consequence of trade wars, but due to the normalization of expansion. That was followed by positive news on the economy, with industrial production rebounding in August from two straight declines with a 1 percent jump.

Continued Support

The ECB anticipates keeping interest rates at record lows at least through the summer of 2019.

Knot said that he and his colleagues haven’t yet discussed what additional changes they might make after net bond-buying ends, and he sees no urgency to do so. While investors have speculated that the ECB might tweak reinvestments of maturing assets to provide more-targeted support, he said it sometimes seems “there is an overestimation of the amount of leeway that is actually there.”

He said he has no strong views about how to communicate changes in interest rates after the first hike -- a topic increasingly on policy makers’ minds -- though he prefers linking guidance to the state of the economy rather than any specific timeframe.

“You cannot lay out a concrete time path, because the economy never develops in a straight line,” Knot said.

Ardo Hansson, the head of Estonia’s central bank, expressed optimism that euro-area inflation is on the right track in an interview earlier on Thursday. He said labor-market developments are “very convincing” and a shortage of equipment at companies was adding to upward price pressures.

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“In our projections and in incoming data there is confirmation that we will continue to generate GDP growth in the euro area that outpaces potential growth,” Knot said. “That, we are convinced in the council, should lead to wage pressures and ultimately higher core inflation.”

— With assistance by Xiaoqing Pi, and Fergal O'Brien

(Updates with comment from Draghi in fifth paragraph, industrial production in seventh.)