ECB’s Knot Hints at Monetary Policy Easing: When and How?

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ECB’s Knot Suggests Easing Monetary Policy, Emphasizes Gradual Approach

Klaas Knot, President of De Nederlandsche Bank NV

Klaas Knot, a prominent member of the European Central Bank (ECB) Governing Council, has signaled that the ECB is poised to begin easing its monetary policy stance, but with caution and gradualism to manage inflation risks.

Easing Imminent, But Gradual

Speaking at the Barclays-CEPR International Monetary Policy Forum, Knot stated that it may soon be appropriate to ease the ECB’s restrictive monetary policy. He emphasized that rate cuts would be introduced slowly, allowing for a cautious approach to balancing economic growth and inflation control.

Despite strong market expectations of a rate cut at the upcoming June meeting, Knot cautioned that the outlook beyond that date remains uncertain. He cited persistent services inflation and global economic headwinds as factors influencing the ECB’s policy decisions.

ECB to Begin Cutting Earlier Than Others

Notably, the ECB is likely to initiate rate cuts ahead of both the Federal Reserve and the Bank of England. Knot’s remarks suggest that the ECB is moving towards a more dovish stance, with only one additional rate cut priced in for the rest of the year.

Disinflationary Trends, Volatility Ahead

Knot acknowledged disinflation since the peak in late 2022, particularly in goods prices. However, he warned that the next phase of the disinflationary process could be volatile due to base effects from energy prices and the unwinding of fiscal support.

Data-Dependent Path

Knot emphasized that the timing and extent of rate cuts will be data-dependent, considering factors such as inflation expectations, economic growth, labor market conditions, and ECB projections.

“The path for 2024 is still expected to be quite bumpy,” Knot said. “We will have to await our next round of projections in June for an updated assessment of the inflation outlook and associated risks.”

Inflation Data and Policy Decision Ahead

The release of preliminary euro zone inflation figures for May is scheduled for Friday prior to the ECB’s monetary policy decision on June 6. These figures will provide crucial insights into the ECB’s assessment of inflationary pressures.

Data sourced from: cnbc.com