MNI BRIEF: ECB Nears Mission Accomplished - DNB's Knot

The ECB is “very, very close to mission accomplished,” Netherlands’ central bank chief Klaas Knot said in an interview Thursday, with inflation risks clearly tilted to the upside and the coronavirus’ omicron variant likely only to delay, not derail, economic recovery.

Current data suggests the ECB should not raise key interest rates before 2023, Knot added, but preparing for gradual policy normalisation is now appropriate, with the expected reduction in the asset purchase programme to EUR20 billion per month from October 2022 creating the option for policymakers to end net purchases “in one step at any time.”

“This would leave our hands completely free in 2023, he said. “But if inflation continues to surprise on the upside also into 2022, we can end the bond purchases sooner and move market expectations of the first rate hike further forward.”

Despite December’s Eurosystem staff projections indicating headline inflation at 1.8% in 2023 and 2024, Knot said he was not yet convinced that inflation will fall below 2% again. “These were the first projections on the basis of which we could no longer confidently say that medium-term inflation will indeed fall below 2%,” Knot said. “Medium-term inflation projections have not always been very accurate. Especially in times of structural changes, models are of limited use.”