The European Central Bank should pause plans to ditch its crisis-era stimulus, the governor of the Dutch central bank has said, in a sign that concerns over disappointing economic growth have spread to the eurozone’s most hawkish circles.
Klaas Knot, a contender to replace Mario Draghi as ECB president, told the Financial Times that the central bank needed to gauge how badly the economy was faring before pressing ahead with plans to normalise monetary policy.
“At this moment a wait-and-see attitude is probably the optimal attitude,” Mr Knot said in an interview in Amsterdam. “We are now going through a couple of quarters where growth has fallen below potential, which means the build-up of inflationary pressures will also incur some slight delays.”
The shift in view by Mr Knot — who last year said the ECB should by now be discussing when to increase interest rates — means he has moved into line with Mr Draghi and the majority on the ECB governing council. It shows the steep deterioration in eurozone sentiment.
Mr Knot’s change of heart comes as the world’s central banks become wary about pushing up borrowing costs amid deteriorating business sentiment and rising political uncertainty. The Bank of England last week cut its growth forecast to a ten-year low and ruled out rate rises, following the US Federal Reserve, which shocked markets last month by abandoning plans to raise rates.
We will have to be patient and modest with respect to the precise moment at which we can expect inflation to converge toward our medium term objective
The ECB is yet to change its stance. But the 25-member governing council, including Mr Knot, has downgraded its outlook — assessing economic risks as “to the downside”.
The council has said it expects to keep borrowing costs on hold “at least through the summer” of this year, but markets now expect the pause to last until 2020 — a view Mr Knot does not dismiss.
The Dutch central banker has said there is no need to raise rates until there is more sign that inflation — which has been too low in the eurozone for years — is rising towards its target of slightly less than 2 per cent. The economic slowdown is now likely to curb inflationary pressure.
“We will have to be patient and also, in my view, modest with respect to the precise moment at which we can expect inflation to converge toward our medium-term objective [of 2 per cent],” Mr Knot said.
The central banker would not go as far as advocating additional measures to support growth — saying “we are not there yet” — but said that in the past, the ECB had been “innovative” when needed.
CV Klaas Knot
14 April 1967
Studied economics at the University of Groningen. Awarded PhD in 1995
Appointed vice-chairman of the Financial Stability Board and will become chairman in December 2021
President of the Dutch central bank
Deputy treasurer general of the Dutch finance ministry
Director of supervisory policy at the central bank
Director of the Dutch Pensions and Insurance Authority
Head of the banking and supervisory strategies department at the central bank
Economist in the IMF’s European department
Senior economist at the Dutch central bank
Mr Knot, 51, is an outside bet to replace Mr Draghi when the Italian’s term expires at the end of October. The Dutchman has recently become vice-chair of the Basel-based Financial Stability Board and will lead the committee once the Fed’s Randal Quarles steps aside in 2021.
Mr Knot has in the past argued against some of the ECB’s more aggressive measures — including the bank’s €2.6tn quantitative easing programme — prompting questions about his suitability for the top job.
“If I was asked to be available, I would formulate an answer then,” Mr Knot said on whether he would like to succeed Mr Draghi.
Other contenders include Bundesbank president Jens Weidmann, Banque de France chief François Villeroy de Galhau, ECB executive board member Benoît Cœuré, Estonia’s top central banker Ardo Hansson, Finland’s Olli Rehn and Mr Rehn’s predecessor at Finland’s central bank, Erkki Liikanen.
While he is considered a hawk, Mr Knot is keen to emphasise that he did not adopt what Mr Draghi dubbed the “no to everything” approach of Mr Weidmann.
Mr Knot pointed out that he supported the ECB’s Outright Monetary Transactions programme — the outcome of Mr Draghi’s promise to do “whatever it takes” to save the euro. He also backed the bank’s adoption of negative interest rates, as well as cheap auctions of central bank cash for commercial banks.
He acknowledged that buying bonds, known as quantitative easing, had clearly helped the recovery: “It eased financial conditions and it reduced financial fragmentation.”
However, he said QE’s helpfulness in raising inflation towards the bank’s target was debatable and side effects could “lead to zombification, both with respect to banking sectors and also with respect to corporate sectors.”
Like Germany, the Netherlands has experienced strong growth and record low unemployment, but its dependence on exports makes it vulnerable to weaker global demand. The European Commission last week said growth would slow to 1.7 per cent in 2019, from 2.5 per cent last year.
“Risks have to do with the external environment, particularly the trade issues and the slowing down of growth in China,” he said, adding that the UK’s decision to quit the EU was “absolutely detrimental” to the Netherlands.
“Imposing trade barriers in a region where previously there were [none] will lead to lower productivity growth on either side of the barrier,” he said. “The short-term disruptions should be manageable, with a decent negotiation and with a decent arrangement. But in the long run it is clearly not a positive factor for our economies.”
However, Mr Knot said talk of a recession in the eurozone was “clearly premature”.
Weaknesses in Italy were down to “domestic policy choices” made by the anti-establishment government in Rome intent on raising spending to boost welfare. Elsewhere, the labour market had “improved quite a bit,” he said.
“We’re beginning to see some wage growth. Oil prices have come down,” he said. “The current situation might last a few quarters, but I’m still positive . . . that afterwards growth will return to levels slightly above potential again.”
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