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ECB at risk of not doing enough to fight inflation, Knot says

The European Central Bank is at risk of not tightening policy enough to fight inflation, Dutch central bank chief Klaas Knot said on Monday, adding that an economic downturn is actually needed to cool price growth.

The ECB has raised rates by a combined 200 basis points since July as inflation is exceeding all expectations but some policymakers, including chief economist Philip Lane, have recently made the case for a slowdown in the pace of rate hikes.

“My worry is still inflation, inflation, inflation,” Knot, an outspoken policy hawk told a conference.

“As long as the risks to our inflation outlook are so clearly tilted to the upside, I think the risk of us doing too little is clearly more pronounced than us doing too much,” he added. “We should not give up too early and not cry victory too early.”

For now, the ECB is still providing accommodation, Knot argued, and the next step will be to get into a territory that restricts growth.

The ECB will next meet on Dec. 15 and policymakers appear to be split between a 50 and a 75 basis point hike in the 1.5% deposit rate.

Knot also urged caution about the ECB’s own projections because the rapid decline in inflation seen over the next several years is unprecedented, so there’s a risk that the process will be more difficult than now envisaged.

Playing down the risk of a recession, Knot said that some recent indicators have been surprisingly good and an economic slowdown is actually needed to control prices.

“If you look at Germany, where actually the economy is doing better than then was feared, it’s not a foregone conclusion that we will get a recession,” Knot told a conference in Paris.

“We will get weaker growth, that’s for sure. But we also need weaker growth to bring inflation back to target.”

Another risk is wage growth, which has been relatively muted this year, but more recent indicators suggest a marked acceleration.

“If you look at the most recent wage deals, they’re clearly not in line with sort of having a 1% productivity growth plus a 2% inflation target,” Knot said.
Source: Reuters (Reporting by Balazs Koranyi, Editing by William Maclean and Gareth Jones)

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