ECB’s Knot Warns Central Bank Could Be Underestimating Inflation


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(Bloomberg) — European Central Bank policy maker Klaas Knot warned that policy makers may be underestimating the potential for accelerating inflation to become entrenched, and that emergency monetary stimulus should end around March 2022.

While the ECB predicts that current elevated inflation rates are temporary — driven by rebounding energy prices and supply shortages as the economy reopens — the Dutch central bank governor said the outcome may be different.

“We should not overestimate our capacity to determine in advance what is temporary inflation and what is not,” he said in an interview with Dutch newspaper NRC. “There are other scenarios conceivable than our base case of persistently low inflation. Inflation is not dead.”

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The ECB is expected to debate the future of its 1.85 trillion-euro ($2.2 trillion) pandemic bond-buying program after the summer, with some on the 25-member Governing Council worried that monetary support will be pared back too soon.

Knot said he has doubts about the central bank’s “activist” use of its balance sheet as a policy tool, and that he regularly expresses that sentiment in policy meetings.

“It is good that we acted quickly in this crisis,” he said. “But as soon as the fire is under control, the fire brigade has to return to the barracks. That should be the case around March 2022.”

The Dutch governor, who also said he might not have backed negative interest rates in 2014 if he’d known how long they would last, said his views on inflation were influenced by conversations with officials who experienced the 1970s. He is a member of the Group of 30, a gathering of mostly former central bankers and policy makers.

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He noted rising house prices as one sign of perceived price pressures, and called for tighter lending standards in the Netherlands. Real estate was the most popular discussion when the Dutch central bank held a “listening event” with citizens and civil society groups as part of the ECB’s strategy review.

That review is studying how to better reflect the cost of home ownership in its measures of inflation, and Knot said he backs a change.

“We as central bankers complain that inflation is too low, but when you talk to people in the country, they say that everything has become so terribly expensive. And then you ask them: what has become so expensive? Then they say: my housing costs,” he said. “And then we say, sorry, but that’s not in our index. Of course that can’t be true.”

©2021 Bloomberg L.P.

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