ECB Governing Council Knot Warns: Inflation May Cause “Major Challenges” Policy Flexibility Is the Key

The Zhitong Finance App learned that ECB Governing Council member Klaas Knot issued a warning saying that the “historic shock” facing the global economy and its ripple effects on prices will be difficult to deal with, and that policymakers need to maintain policy flexibility.

The Dutch central bank governor pointed out in his speech on Wednesday that the global trade pattern is full of high uncertainty, and the mechanism by which the economy responds to changes in the current situation is also difficult to predict. He said that although the downside risks of economic growth and inflation predominate in the short term, the medium- to long-term prospects critical to ECB policy are “more complicated and difficult to discern.”

“As was the case during the pandemic, we are currently facing great uncertainty — it is difficult to predict how households and businesses will respond to this shock,” Knot emphasized. Once again, we are being hit by double shocks on the demand side and the resulting inflationary dynamics may present major challenges.”

This statement comes on the eve of a quiet period before the ECB's June 4-5 policy meeting. The market generally expects policymakers to cut interest rates for the eighth time in the current cycle at this meeting, reducing deposit interest rates to 2% — this level is in the middle of the estimated range of neutral interest rates.

Knot reiterated its policy stance, “I think maintaining a monetary policy stance that is neither loose nor austerity is the right choice.”

Additionally, he stated, “In the current environment, economic models can only provide limited references. Even if demand continues to weaken due to increased uncertainty, continued disruptions in the global supply chain and trade retaliation measures may push up prices. Furthermore, fiscal stimulus policies (particularly increased defense spending) will put upward pressure on inflation.”

“We adhere to data-driven principles, focus on medium-term inflation targets, and are committed to keeping the inflation rate at the 2% target level in a steady and reliable manner — not only to achieve the target in the benchmark scenario, but also to ensure that this goal can be achieved in all reasonable situations,” Knot added.