ECB's Knot Sees Chance of Faster Return to Normal Interest Rates

(Bloomberg) -- European Central Bank officials may consider speeding up the process of removing their extraordinary stimulus if the euro-area economy evolves in line with projections, according to Governing Council member Klaas Knot.

“If our baseline scenario is confirmed in the next few months, we might think again about the pace of our normalization and might not have to wait that long,” he told German newspaper Boersen-Zeitung in an interview. “Everything depends on how the economy develops.”

Knot’s remarks highlight that some officials are starting to ponder the path of interest rates after liftoff, as well as strategies to guide investors. The ECB’s current line is that rates will stay at record lows at least through the summer of 2019.

Several Governing Council members have stressed the need to communicate more on the pace of increases to avoid stirring up markets after net asset purchases under the ECB’s 2.6 trillion euro ($3 trillion) bond-buying program come to an end in December.

The Dutch central bank president also told the newspaper that, while the euro area’s September core-inflation reading of 0.9 percent was “a bit disappointing” there was “no reason to fundamentally question” the outlook for a pickup. He added the ECB’s current communication on when it will raise borrowing costs is an “expectation. That means there are other possible outcomes around this central expectation, in both directions.”

Rate Pattern

“From January, we will need to focus more emphatically on what needs to be done about interest rates,” Knot told reporters in Amsterdam earlier on Monday. In the newspaper interview, he elaborated that a second rate hike “is likely to be as important, if not more important” than the first, as it “might create the impression of a pattern.”

Several key ECB officials have so far expressed a preference for stressing policy makers’ ability to react to economic conditions that warrant a change in borrowing costs, rather than publishing a likely path of interest rates -- a strategy the U.S. Federal Reserve follows with its so-called dot plot.

Read more: ECB’s Knot Supports Call for EU-Led Money Laundering Control

In the interview, Knot stated that the ECB “will never be able to announce precise dates” given how unpredictable the economy can be, but floated several options including that the central could announce how many times it intends to raise rates per year.

“One question is also whether the negative interest rates are special and if we want to get rid of them as soon as possible,” he said, referring to the ECB’s 0.4 percent charge on overnight bank deposits. He added that the Governing Council has not discussed any options for altering its communication so far.

©2018 Bloomberg L.P.