Belgium, (Brussels Morning Newspaper) Klaas Knot, head of the Dutch central bank, warned that the European Central Bank (ECB) risks not doing enough to curb rising inflation.
The ECB has increased interest rates by 200 basis points since it started the hikes in July in an effort to rein in inflation which has exceeded expectations, according to Reuters reporting on Monday.
Knot pointed out at a conference on Monday that economic contraction is necessary to slow down inflation, noting that ECB chief economist Philip Lane recently called for slowing down rate hikes to protect economic growth.
“My worry is still inflation, inflation, inflation,” Knot stressed and added, “as long as the risks to our inflation outlook are so clearly tilted to the upside, I think the risk of us doing too little is clearly more pronounced than us doing too much.”
He stressed the importance of implementing measures to curb inflation and pointed out “we should not give up too early and not cry victory too early.”
Knot noted that the ECB is still leaving room for economic expansion, stressing that the next step will be to push rates higher, to growth-restricting levels.
EU central bank leaders are to meet on 15 December to discuss policies and are apparently split on how much to raise the bank’s deposit rate, with some calling for an increase of 50 basis points and some calling for 75.
ECB’s optimism
Commenting on ECB’s projections, Knot noted that the bank expects an unprecedentedly rapid decline in inflation and warned that its projections are unrealistic.
“If you look at Germany, where actually the economy is doing better than then was feared, it’s not a foregone conclusion that we will get a recession,” he pointed out and stressed that some indicators have exceeded expectations.
“We will get weaker growth, that’s for sure… but we also need weaker growth to bring inflation back to target,” he reiterated.
Commenting on wage growth, Knot pointed out that it presents a risk. “If you look at the most recent wage deals, they’re clearly not in line with sort of having a 1% productivity growth plus a 2% inflation target,” he concluded.
