The European Central Bank will be ready for an interest rate hike early next year after ending the remaining bond purchases by the end of this year, Governing Council member Klaas Knot said on Thursday.
“All switches are on track to end the remaining bond buying by the end of next [this] year — and when that’s done, the policy rate can go up early 2023,” he told the Dutch Trouw in an interview.
Asked if his colleagues in Frankfurt have a similar time frame in mind, Knot said: “We’ll have to see, but I do think so. A lot will depend on how the economy will develop next [this] year, a year is long.”
Earlier last month, the bank confirmed that it would wind down its COVID-19 pandemic bond-buying program, but temporarily expand an older quantitative-easing program to cushion the transition.
Knot’s sentiment was echoed by his fellow Governing Council member Robert Holzmann, who heads Austria’s central bank and has a similarly hawkish stance.
“The decisive factor in the new year will be to gradually initiate the exit from negative interest rates and unconventional monetary policy and to avoid any proximity to monetary state financing,” Holzmann said in a year-end statement on his institution’s Web site.
The European Central Bank has had a negative deposit rate since 2014.
Money markets are wagering on at least 10 basis points of hikes from it in December this year, based on euro short-term rate pricing.
Other major central banks are tightening monetary policy more quickly.
The US Federal Reserve has doubled the pace of its stimulus exit, while the Bank of England last month delivered a surprise rate hike — the first among major central banks since the pandemic struck — citing “more persistent” inflation.
The Omicron variant of SARS-CoV-2 is likely to have little influence on prices this year for the time being, but if the impact is bigger, the European Central Bank is ready to change its policy faster than currently planned, Knot said.
Speaking in a separate newspaper interview published in Germany’s Boersen-Zeitung, Knot said that “inflation can go either way because of Omicron.”
“Further supply bottlenecks would be inflationary,” he said. “Temporary declines in aggregate demand would initially put downward pressure on inflation. We have to monitor and remain vigilant.”
The governor of the Dutch central bank told the Dutch Trouw that he sees the risks of persistent inflation slightly stronger than the Frankfurt-based monetary authority.
Several policymakers cast doubt on the likelihood of inflation slowing to exactly 1.8 percent next year and in 2024 as the European Central Bank forecasts.
Still, Central Bank of Italy Governor Ignazio Visco said in an interview with La Stampa that the risks to the European Central Bank’s inflation estimates “are not only upwards.”
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