March 29, 2018 / 11:03 AM / a month ago

HIGHLIGHTS-Comments from ECB policymaker Knot in a Reuters interview

AMSTERDAM, March 29 (Reuters) - The following are key comments by Dutch central bank chief Klaas Knot on European Central Bank policy in a Reuters interview.

For an interview story, click on:


“You never know with certainty whether you are ahead or behind the curve. Some, including me would say that at this moment, the risk of falling behind the curve is a bit larger than the risk of being too far ahead of the curve. But at the same time, if you look at the market expectation of our policy action, I would say they have more or less converged at what I call a sweet spot.

“We are managing a turning point in the monetary policy cycle. And managing turning points in the monetary policy cycle is one of the biggest challenges policymakers have to face. So we have to be cautions, we don’t want to create undue volatility around the turning point.

“That is why I’m also relatively comfortable with these market expectations for ending the APP sometime in the fourth quarter after a short taper, if needed, and a rate lift-off sometime in the second quarter of 2019. That’s my interpretation of market expectations. There is a fair degree of consensus around these expectations. This is not giving rise to a heated debate.

“Although if you ask me where we could err, I would say, the likelihood of us erring on the side of being too cautious is a bit larger than for us being too bold. ON THE COST OF THE ECB FALLING BEHIND THE CURVE

“There are questions about why the Phillips curve has been so elusive. It could be an issue of non-linearity. Once you see inflation take off, it might actually be faster than we think. But given the high level of indebtedness, we would not want to be forced to raise interest rates very quickly in response to that.

“Given the high levels of debt, we will have to be in position to gradually increase interest rates to a more neutral level and we should clearly avoid a situation of having to accelerate monetary tightening.


“In the short term, the growth outlook is very good. And since we are growing at roughly double the potential, we will continue to utilize capacity, and that means we are well on the way to achieving our inflation objective of below but close to 2 percent in the medium term. There are a few clouds on the horizon, which have to do with trade. If you restrict trade, it’s a negative supply shock. So it means a stagflationary impact: less growth and little bit more inflation, but not of the kind we’d like to see more of. But at the moment, the size of the trade volumes that seems to be impacted (by U.S. tariffs) is not yet really worrisome.

“I think if you look at the global growth outlook, it is as good as it gets. If you look at the euro zone growth outlook, it is as good as it gets. If you look at the Dutch growth outlook, it is as good as it gets. And I don’t see any reasons for a meaningful decline in the coming quarters.

“I don’t think we can grow much faster than this and inevitably you’ll see a gradual return to levels closer to potential. But I’m not all that worried yet about some of the recent readings that have been off their all-time peaks. It’s a normal development. Economic expansions don’t die of old age. You need to have a reason for expansions to end.

“What is true for the euro zone economy, is even more so the case for the Dutch economy, even if its potential is also higher. The Dutch economy is growing at roughly twice the rate of its potential. But the Dutch economy actually has less capacity left, I’m quite convinced. You can already see capacity constraints in the labour market, you see that wage growth is now accelerating, so there’s more evidence that inflationary pressures are coming, more so than in the euro zone.


“This is a plausible argument and it could be one of the reasons why inflation is taking more time than we thought earlier to increase to our objective. But I would caution against putting too much emphasis on contemporaneous measures of slack that are notoriously unreliable.

“Let’s suppose that the output gap did not close in the fourth quarter of 2017, as ECB staff estimated, but that it will close in the first or the second quarter of 2018. Does it really matter from a medium term perspective? From my perspective what matters is that we have growth that exceeds potential and we remain assured that slack is reduced. And the exact timing of when the Phillips curve reasserts itself is less important from a medium term perspective. Medium term should not be equated with our projection horizon. ON HOW CLOSE ARE WE TO SUSTAINED ADJUSTMENT IN THE PATH OF INFLATION OR SAPI

“First it is good to keep in mind that SAPI-criteria are dynamic rather than static, even after meeting them again inflation will not move sideways in a straight line.

“I think we are getting relatively close. If you look at the inflation outlook and look for convergence, well, at the end of the projection horizon, the outlook is for headline inflation at 1.7 percent and core inflation at 1.8 percent, so that’s only 0.1 and 0.2 percentage point away from the 1.9 percent our models use.

“If you look at confidence, this outlook has been relatively stable for a series of projection exercises. And as long as growth continues to be double or well above potential, then there is confidence this outlook can materialize. If you look at resilience, well, the size of the purchases has already been reduced, and internal staff estimates suggest the remaining impact on inflation to be around 0.2 percentage point.

“So I would say that based on these three criteria, the remaining deviations from SAPI are relatively limited. And my question would be: do they really matter from a medium term perspective? ON DISCUSSING A REVISION OF THE FORWARD GUIDANCE

“I agree that it would be appropriate to start this discussion.

“In the framework that I see for the coming years, interest rates will again become the margin of policy adjustment. So interest rates will have to take centre stage.”

“We will have the reinvestment phase. That will in my view be in the background as a sort of stabilizing force where I think it will contain volatility, it will contain any impact on the term premium.

“That means that to the extent we want to continue giving guidance to the market, the guidance should primarily focus on interest rates.”

“One of the current functions of the APP is that through the end date of the APP, we give indirect guidance on interest rates. That is no longer necessary. The APP stock is now so large and the free float is now so small that I think we can safely rely on stock effects while the net flow effects really don’t matter that much anymore. We don’t need to cement credibility on the rates by continuing to purchase assets. We can at some stage move to direct guidance on rates. And I have no doubt that guidance will be credible, as it was in 2013 when there were no asset purchases on the horizon. ON THE TIMING OF THE NEW GUIDANCE

“We need to stick to the sequencing that is in place, so first end asset purchases and only then start touching rates. So it seems to me that if you start giving guidance on rates before you’ve taken the decision on APP, that is potentially contradictory. ON THE PACE OF NORMALIZATION

“Let there be no doubt about it that the process will be gradual and slow. And that is also because of the still high level of indebtedness in the economy. That will also mean that rates will continue to be accommodative for quite a significant period of time. ON FX MOVEMENTS

“I’m more comfortable with an exchange rate appreciation that is the effect of a positive demand shock, as its pass through to prices is limited. And I do think that most of the recent euro appreciation has been the result of a positive demand shock. We will continue to monitor but the recent exchange rate appreciation is not a big cause of concern for me.” (Reporting by Balazs Koranyi)

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