By David Milliken
WASHINGTON (Reuters) – The European Central Bank should keep its options open regarding future interest rate moves, Dutch central bank chief and ECB Governing Council member Klaas Knot said on Saturday.
“It is important that we keep all options open. Retaining full optionality would act as a hedge against the materialization of risks in either direction to the growth and inflation outlook,” Knot said at a meeting of the Group of Thirty in Washington.
“We believe that our meeting-by-meeting and data dependent approach has served us well,” he added.
Last week the ECB cut interest rates for the third time this year and four sources close to the decision told Reuters a fourth cut was likely in December unless data turned around in the coming weeks.
Knot likened the current economic situation in the euro zone to the weather in Amsterdam at this time of year: “It’s not as bad as some people would have you believe, but it’s definitely not great,” he said.
Incoming data since September had increased the ECB’s confidence that inflation would return to its 2% target and increased the risk of disappointing growth in the short and medium term, Knot said.
But the euro zone still needed to see services price inflation cool further and a “significant easing” in wage growth to ensure that inflation returned durably to target, he added.
“On the one hand, policy restriction may be reduced more quickly if incoming data indicates sustained acceleration in the speed of disinflation or a material shortfall in the economic recovery,” Knot said.
“On the other hand, policy restriction may be taken away more slowly, should upside risks to inflation materialize or incoming data share the opposite picture regarding growth and inflation.”