The bottom line: The ECB won’t raise interest rates as sharply as the US

The European Central Bank (ECB) is unlikely to raise interest rates in the euro zone as the Federal Reserve has done in the US. De Nederlandsche Bank (DNB) President Klaus Knott announced this at a meeting at the International Monetary Fund (IMF) in Washington.

According to the head of the Dutch central bank, US inflation is mainly driven by strong consumer sentiment, while price increases in the Eurozone are mainly the result of higher gas prices after the Russian invasion of Ukraine.

Knott also pointed out that the ECB may not raise its interest rate further. The ECB raised its interest rates by 0.75 percent in September to combat high inflation. This is the largest interest rate hike by the central bank. Knott believes steps of 0.75 percent will be enough to meet the ECB’s inflation target.

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But it would take two more strong rate hikes like this to return interest rates to neutral levels. According to Knott, raising interest rates a little more would be beneficial. It’s still hard for him to specify what the neutral level for interest rates that central bankers are willing to talk about would be. At that level, the economy is neither retrenched nor stimulated.

‘Unprecedented’

Inflation in the eurozone is still far from the ECB’s target of 2 percent. Knott speaks of an ‘unprecedented situation’ and wonders aloud how far the central bank will have to go to contain significant inflation. According to the country, this is something that is revisited by policymakers at the ECB at each interest rate meeting.