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“Klaas Knot, the hawkish Governor of the Dutch central bank, discussed the outlook for the ECB’s interest rate policy today,” notes ABN AMRO’s Nick Kounis, head of financial markets, and adds: “In an interview with the German newspaper Boersen-Zeitung, he said the ‘through the summer’ guidance on the period of unchanged policy rates was an expectation and that means ‘there are other possible outcomes around this central expectation, in both directions’.”

Key quotes

“Perhaps unsurprisingly given his leanings, he thought that this may mean sooner rather than later. Mr Knot asserted that ‘if our baseline scenario is confirmed in the next few months, we might think again about the pace of our normalization and might not have to wait that long’. Indeed, he also played down the recent ‘disappointing’ outturn for core inflation, saying that there were still ‘fundamentally’ good reasons to expect core inflation to accelerate.”

“He then went on to discuss options for a further enhancement of the ECB’s forward guidance, to elaborate not only on the timing of the first rate hike, but also on the pace of normalisation after that. One of the options he floated was communicating how many times a year the ECB would need to hike the policy rate. Here too he seemed to tilt to the hawkish side, suggesting the central bank could have reason to get interest rates out of negative territory ‘as soon as possible’.”

“Other ECB officials – such as Benoit Coeure and Peter Praet – have also discussed forward guidance. However, Mr Coeure, a centrist, seemed to signal – by pointing at forecasts from sophisticated Taylor Rules – that interest rates would go up at an exceedingly slow pace. A lot will depend on the path of core inflation as well as the identities of the next ECB President and Chief Economist, as the terms of Mario Draghi and Peter Praet end next year. Our own view is that core inflation will recover slowly, while centrists rather than hawks will take the helm of the Executive Board. As for forward guidance, giving guidance on the pace of hikes – rather than precise timing – conditioned on the outlook, could be a good way to avoid unnecessary volatility.”