June 29, 2022

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Dutch central banker raises prospect of steeper ECB rate increase in July

2 min read

A top European Central Bank official has raised the prospect of a half percentage point interest rate increase in July if inflation continues to climb, the first time such an aggressive shift has been mooted.

Tuesday’s comments by Dutch central bank chief Klaas Knot, one of the more hawkish members of the ECB’s rate-setting body, sent ripples through financial markets, as the euro rose 1.1 per cent against the US dollar to $1.0546 and eurozone government bond prices fell.

ECB president Christine Lagarde has signalled that the bank’s first rate rise for more than a decade is likely to occur at July’s governing council meeting. But she and many other policymakers have stressed they will move only “gradually” — indicating any change to rates will be in quarter-point increments.

Knot’s comments make him the first ECB governing council member to say it could raise its deposit rate by half a percentage point in July. That would take the rate from minus 0.5 per cent to zero in a single move.

“Based on current knowledge, my preference would be to raise our policy rate by a quarter of a percentage point — unless new incoming data in the next few months suggests that inflation is broadening further or accumulating,” he told Dutch TV programme College Tour. “If that is the case, bigger increases must not be excluded either.”

Knot added: “In that case a logical next step would amount [to] half a percentage point.” Eurozone inflation for April reached 7.5 per cent — well above the ECB’s target rate of 2 per cent — and price pressures are continuing to build due to the fallout from Russia’s invasion of Ukraine and China’s coronavirus lockdowns.

“This is the first such statement challenging the ECB’s commitment to gradual tightening,” said Frederik Ducrozet, a strategist at Pictet Wealth Management. “Now this is also a proposal that the doves can oppose. I would watch their reaction closely in coming days.”

The ECB last raised…

2022-05-17 09:41:21

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