Knot Says ECB Could Raise Rates Any Time From September

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The European Central Bank should end bond-buying before the summer, clearing the path for a possible increase in interest rates as early as September, Governing Council member Klaas Knot said.

Speaking Friday after another record reading for euro-area inflation, Knot -- one of the ECB's most-hawkish officials -- said that while the institution could still afford to be gradual in its stimulus exit, it should “probably” halt asset purchases at the start of the third quarter.

“When we come back from our summer break, I don't think we are currently in the position to exclude any possible scenario in respect to liftoff,” he told Bloomberg Television at the Ambrosetti forum in Cernobbio, Italy.

“That could be September, October, December -- it could all be possible,” Knot said.

After mapping out an accelerated exit from stimulus measures, ECB officials are increasingly supportive of raising rates this year for the first time in more than a decade. Inflation is currently the key focus, with prices in Knot's home country of the Netherlands surging almost 12% last month, according to preliminary data.

Knot said last month that market expectations for a rate increase later this year are quite realistic. He didn't rule out two hikes in 2022, should forecasts for already-soaring consumer prices shift higher still.

The Dutch official pushed back, however, on a suggestion that bond-buying could be ended even earlier than the current third-quarter deadline.

While the ECB is closely monitoring wage developments and other second-round effects, “that would require a real change in the inflation outlook for which I don't see any convincing evidence yet,” he said. “At this moment, we don't see a very strong effect that makes us question the inflation outlook over the medium term.”

With Russia's invasion of Ukraine roiling global supply chains and sending already-soaring energy costs higher, Europe's rebound from the pandemic is also set to be slower than previously anticipated. 

The world is underestimating the medium-term impact of the war, OECD Chief Economist Laurence Boone said separately on Friday. Some policy makers have discussed the prospect of stagflation.

Knot was more optimistic, characterizing the likely economic outlook as one of “slowflation.” A recession in the euro area is unlikely, he said.

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