Knot Says Investors Are Underpricing ECB Rate Hikes

On Thursday, Klass Knot, the chief of the Dutch central bank, said that markets could underestimate the rate hikes planned by the European Central Bank (ECB).

He added that most of the remaining interest rate hikes to be delivered would be in terms of 50 basis points.

The hikes

While a hike of 50 basis points had been flagged by the ECB for the coming months, many investors are actually pricing out some of these increases.

Instead, they anticipate that smaller increases will be delivered and interest rates will peak at a lower rate.

Knot said that it was unlikely that the increases would come to a stop after the next rate hike of half a percentage point. He also stated that policy guidance should be taken seriously be investors.

He stated that they had a lot of ground to cover and intended to do so with constant 50 basis points increases.

He also added that the ECB intended to continue tightening their monetary policy at least in the first half of the year and the existing market pricing of rates was not in accordance with the aim of the bank of reducing inflation.

Market conditions

After some rate hikes were priced out by investors, Knot said that the market developments that had taken place in the last two weeks were not welcome.

He stated that this was because they were incompatible with the bank’s aim of reducing inflation to its 2% target from its existing level of 10%.

According to Knot, the focus of the bank currently was too little tightening of monetary policy and there is still time before they reach a balanced risk perception.

The governor of the Dutch central bank also said that benign growth data showed that a recession could be avoided by the 20-country currency bloc over the winter, but they would experience weak growth.

The change

Markets have priced in a rise in the current 2% ECB deposit rate to 3.2% by the middle of the year, which is a reduction from the 3.5% they had priced in at the beginning of the year.

An interest rate increase of 50 basis points has been fully priced in by markets for the month of February, but the same hasn’t been done for March.

Part of the reason that the markets have changed their stance is that the US Federal Reserve is also expected to slow down its pace of interest rate hikes.

Therefore, they believe that the ECB would also follow in the footsteps of its counterpart. But, it should be noted that the inflation problem is different for the two countries.

The US inflation is said to have likely touched its peak, but the same cannot be said for the eurozone, as inflation could still move up.

There is still a rise in core inflation, which does not include volatile fuel and food prices. Knot said that core inflation would have to show a different dynamic for the ECB to think about slowing down.

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