ECB's Knot sees big May rate hike if core inflation doesn't fall: MNI

ECB council member Knot appears at a Dutch parliamentary hearing in The Hague
European Central Bank (ECB) council member Klaas Knot appears at a Dutch parliamentary hearing in The Hague, Netherlands September 23, 2019 REUTERS/Eva Plevier/

FRANKFURT, Feb 8 (Reuters) - The European Central Bank may extend its streak of large interest hikes into May if core inflation doesn't ease by then, ECB policymaker Klaas Knot said on Wednesday.

The ECB raised interest rates by half a percentage point last week and pencilled in a move of the same magnitude for next month but kept options open for its following meeting in May, with sources telling Reuters they expected a 25- or 50- basis-point increase then.

Knot, the Dutch central bank governor and a leading policy hawk, said the ECB should only decrease the pace of rate hikes once it sees underlying inflation, which strips out energy and food prices, abate.

"If underlying inflation pressures do not materially abate, maintaining the current pace of hikes into May could well remain warranted," he told an online event organised by MNI Market News.

"Once we see a clear and decisive turn in underlying inflation dynamics, I...expect us to move to smaller steps."

Knot said headline inflation had likely peaked and may come down faster than the ECB predicted in its December projections, courtesy of cheaper energy.

He expected inflation in core goods to start falling too, also thanks to easing supply constraints.

But he warned that inflation in core services may prove sticker and may get a further boost from rising wages.

"Forward-looking wage indicators confirm that wage growth will increase further in 2023," Knot said.

He expected workers to gain more bargaining power in salary negotiations as the economy holds up better than the ECB expected only a few weeks ago.

"The slowdown in growth seems to be even more shallow and short-lived than we had expected...with probably no recession in this 2022-23 winter – not even a technical one," Knot said.

Reporting By Francesco Canepa; Editing by Christina Fincher

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