ECB's Knot Advocates for Flexible Interest Rate Policy

In his latest statement, Klaas Knot, President of the Dutch central bank and member of the European Central Bank Governing Council, emphasized the importance of maintaining flexibility in the ECB's interest rate policy. Speaking at the G30 meeting in Washington, Knot underscored the necessity for the ECB to keep all options on the table to effectively respond to risks related to economic growth and inflation.

Knot praised the ECB's current approach of making decisions on a meeting-by-meeting basis and adjusting according to incoming data, stating that it has been effective. This approach gained particular significance as the ECB reduced interest rates for the third time this year last week. Sources close to the ECB suggested that a fourth rate cut could occur in December, depending on upcoming economic data.

Knot likened the economic climate in the Eurozone to Amsterdam's autumn weather, implying that some conditions are not as bad as some may think, though they are still far from ideal. Data received since September has increased the ECB's confidence that inflation will return to its 2% target, but it has also indicated a potential for weaker growth in the near and medium term.

Additionally, Knot pointed out that for inflation to sustainably reach its target, a further decline in services price inflation and a significant slowdown in wage growth across the Eurozone are necessary.

Knot also outlined possible scenarios for future policy adjustments. If data indicate that disinflation is accelerating or that economic recovery falls short of expectations, the ECB might reduce policy constraints more rapidly. Conversely, if there are upward risks to inflation or if data suggests a different trajectory for growth and inflation, a slower removal of policy constraints could be warranted.

The ECB's approach and Knot's statements reflect a cautious and adaptable stance in the face of uncertain economic conditions in the Eurozone.