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MNI BRIEF: Asset Repricing Means Lower Terminal Rate - Knot
Monetary policymakers must be “bold but realistic” in pursuing price stability step-by-step, Dutch central bank chief Klaas Knot said in a speech Tuesday, amid the first signs that higher interest rates are being transmitted to the real economy, but with core inflation likely to hold stubbornly above target unless continued action is taken.
Tighter financing conditions and lower credit growth are “are only the first, concrete steps in the transmission of our monetary policy tightening. And we have yet to see their full effect,” he said, noting also that ECB monetary policy is “killing two birds with one stone: it is addressing medium-term risks to price stability, while the direction of monetary policy - in principle - aids in addressing longer-term financial stability concerns.”
And while vulnerabilities in the financial system have become apparent since the ECB started raising rates, “moderate and contained levels of financial turbulence do not necessarily have to be at odds with medium-term price stability,” Knot said. “As long as such repricing is not excessive, it can in fact be combined with a somewhat lower terminal policy rate that would still be compatible with medium-term price stability.”
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