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Interview Klaas Knot in La Stampa
Gepubliceerd: 21 januari 2023
Interview Klaas Knot door Marco Zatterin en Fabrizio Goria van La Stampa. Gepubliceerd op 21 januari 2023.
“The ECB must raise interest rates significantly to ensure price stability: 50bps in February and March”
Interview with the president of the Dutch central bank, Klaas Knot: «I’m not a hawk, inflation is the worst tax for all citizens»
“I use my heart”. Klaas Knot rejects the Mario Draghi’s joke about the sentiments of a central banker and denies being ”a frugal hawk”. He says these are labels one earns if he thinks that inflation is “the worst tax for citizens” and is willing to do anything to harness it. For this reason - argues the president of the Nederlandsche Bank, the central bank of the Netherlands - Christine Lagarde's monetary policy orientations are now more valid than ever, so sides for two half-point rate hikes in the next two months. To the Italian critics of the Frankfurt’s Institution, including the Defence Minister Guido Crosetto, he responds with the slogan of the late Wim Duisenberg, “I hear you, but I do not listen”. That said, one rule seems clear to him. We the Europeans should stop criticizing ourselves: “The finger pointed in an international environment rarely improves thing”.
What's your assessment of the broader economic situation? Shall we skip a recession?
“Whether we will escape a recession or not, is not the most relevant question for me. We have seen a growth slowdown in 2022. Towards the end of the year, the data have improved. A prolonged recession now, thankfully, seems unlikely. Whether we will fully avoid a recession, or face a shallow one, I do not know. The odds of skipping it might be improving. But the central point is another one”.
Which one?«In both cases the growth outlook for 2023 will not be very abundant. There will be no room for monetary policy support and little, if any, for fiscal policy support. The Euro Area economy will have to rediscover its growth engines. A lot of private and public investment will be needed for the energy transition. There is a positive element of the reopening in China, which in the short run will clearly have a positive demand effect. Over the medium term it will also unclog some of the supply constraints that are still there. All in all however, I think 2023 will be a year with at best moderate but probably subdued growth”.
Has inflation peaked?
“In a “no-recession” scenario we will also have less automatic cooling down of inflationary pressures. In the December data, we saw a first decline in headline inflation, but that was entirely due to base effects and lower energy inflation. Lower headline inflation is very important for our citizens, to limit their loss of purchasing power. But from a monetary policy perspective, energy inflation is yesterday's news. We focus on core inflation where, unfortunately, there is no good news. Because it is still on the rise. Underlying inflationary pressures show no signs of abating yet”.
What’s the natural consequence?
“The policy conclusion is that what our President Lagarde said in December, is even more valid today. We will still have to raise interest rates significantly and bring them into a sufficiently restrictive territory to ensure a timely return of inflation toward our target”.
The headline inflation is falling, but the core rate is rising. Is that enough to continue with rate hikes?
“If you look at the decomposition of the several inflation elements, you see that inflation is following a fairly predictable pattern. We first had energy inflation, then inflation in industrial goods, and now we also have services inflation. It is a logical sequence if you have such a massive shock, but let us go back for a moment to where that inflation shock was coming from».
“On the demand side we had the reopening from Covid. It was much stronger than we anticipated. And on the supply side we had a negative shock coming from Russia and its brutal and unjustifiable war in Ukraine, which led to various energy supply disruptions. That was the initial shock, that then gradually moved into energy, industrial goods, and services. The problem is that we know that particularly in services, but to some extent also in industrial goods, inflation tends to be persistent. We are now in a situation where this persistence is my main concern when it comes to how inflation will develop from here”.
Your French colleague Villeroy de Galhau said the increase will be 0.50 basis point in February.
“I entirely agree. And not only in February. I think our President has been very clear. We made a step down in December from 75 to 50 basis points. That will be the pace for a multiple number of meetings. So that means at least the two in February and March”.
In June there will be the general assessment of the monetary policy. Do you already foresee a change in the second half of the year?
“It is too early to tell. In my comments I try to restrict myself to the first half of the year. I do think that we will continue to be in tightening mode until the summer. But at some point, of course, the risks surrounding the inflation outlook will become more balanced. So at this moment, the risk that we have to manage is the risk that we do too little, not too much. But in the course of the year, as we will have covered more ground, the risks will become more balanced as well”.
“Then we must become more nuanced in our weighing of the risks of doing too little versus the risks of doing too much. That would also be a time in which we could make a further step down from 50 to 25 basis points, for instance. But we are still far away from that. I want to re-emphasize that this is not in sight for the upcoming meetings”.
The Bundesbank does not see a spiral between wages and prices. Is that a problem or not? “Luckily, we are not seeing a spiral yet, even if wages are clearly responding to prices. Look at recently concluded wage contracts, look at the Central Bank of Ireland’s indicator of the latest developments in Germany, France, Italy, Spain, Netherlands, and Ireland – and you will see that wages are steadily rising, and the end is not in sight. But to have a wage-price spiral you need to be in a situation where firms will then have no choice but to trigger a second round of price increases. Which is not the case yet because corporate profitability is still very high and profit margins can easily absorb the kinds of wage increases that we currently see. So that is why we are not seeing it yet”.
Talking about the ECB, here’s the Italian question. There have been several voices in the government against you central bankers. The Defence Minister Guido Crosetto said Frankfurt is too powerful and that its mistakes are putting Italy at risk. Governor, are you and the ECB putting Italy at risk?
“I am convinced we are not. And I believe that all economies in the euro area have greatly benefited from what we have done in the past. It is always unfortunate to hear politicians’ comments on ECB policy. It does not make our life easier even if it does not change policy at all. But to be fair, in the past such comments have not only been coming from Italy. In that context, I always like to quote my late predecessor Wim Duisenberg. When facing such critics, he always said: “I hear what you say, but I don't listen”, which neatly summarizes it all. It must be clear that the ECB is there for all 20 Member States in the Euro Area. So the ECB is also there for Italy”.
Has the ECB become a scapegoat of last resort? When you don't know how to tackle a problem, then blame the ECB…
“To some extent, it is the fate of central bankers. There is consensus in Brussels, Frankfurt and hopefully also in Rome that the Italian public debt issue can only be solved in Italy and only by higher growth. Because we know from historical experience that public debt ratios can only be brought down by the denominator effect from generating higher growth. I publicly supported many initiatives like the NextGen EU Recovery Fund even when in the Netherlands it was not fully accepted. To generate higher growth you need a combination of public investment, private investment plus structural reforms. This is what Italy needs. At the end of the day, productivity growth is the only source of sustainable increases in prosperity”.
Wouldn't it be easier for the European Union to have a different concept of debt? Because in the sense that we're Italians, we have a 155% debt-to-GDP ratio, but if you put together private and public debt…
“The Netherlands has a higher debt ratio than Italy”.
And Germany is worse. So, it has a crisis, and who suffers from the crisis: the private sector, or the public sector? My brother had a mortgage or Italy was guaranteed by you? Well, isn't it risky?
“I think all forms of indebtedness have their specific risks. But they are, of course, not comparable. For example, the credit risk of a mortgage is mitigated by collateral: the house. Public debt is not collateralized, even if the government has the capacity to levy taxes. The Italian experience however shows that the capacity to levy taxes is not unlimited. All debt categories have different risk and mitigation measures, which make the nominal levels of debt not comparable».
Considering private and public debt together is a solution raised in Italy whenever somebody points the finger to the high debt of the country.
“True. But we should not point the finger toward each other. Also in the Netherlands, when somebody starts talking about Italian public debt, I very quickly begin to talk about Dutch mortgage debt. I think we all have our own issues; we should focus on our own issues, and we should try to learn from each other. But finger pointing in an international environment seldomly makes things better”.
Do you remember Mario Draghi's joke about central bankers? He said that in case of cardiac surgery you should ask for a central banker heart because it’s never been used. Do you use your heart?
“I use my heart. When I act in my role as member of the Governing Council and as governor in Dutch society, I do care about social issues like growing inequality. I do care about the consequences of inflation for people with lower incomes. We know that inflation is a regressive tax that nobody voted for. We know that particularly the lower income households pay the price of higher inflation. That only strengthens my motivation to bring inflation back to target as quickly as possible to avoid further inequality”.
You are often called a “frugal hawk”. Is that comfortable?
“Such a label is never something that one can choose. The press loves to put labels. As a central banker I have always been very inclusive. I have been among the first officials that made an official apology for the role that De Nederlandsche Bank played in the Dutch slavery past. We try to be as diverse as possible also in our human resource policies, etc. I really believe in that, and I take that role very seriously”.
So, you have the heart and you’re not frugal.
“I am definitely not frugal. I could be hawkish in the sense that I do believe that inflation is very bad for social cohesion. If you want to call that hawkish, then I can accept the label. I believe price stability is the best service that we can deliver to society”.
Let's talk about Quantitative tightening, after over 10 years of Quantitative easing, that in some ways crystallized the bond market for a long time transferring risks to other markets. What do you have in mind about the QT?
“This is another example where I do not think that I have taken a particularly hawkish position. I support what we have decided, to start with 15 billion per month of discontinuation of reinvestments. This is what I would call a toe in the water. I wholeheartedly support a cautious approach because we have never done QT in history. We have to learn along the way, for example how much impact our actions will actually have”.
Markets’ response was good.
“The announcement of the 15 billion has gone very well. The spreads did not respond at all. Next we will have to see how the markets will absorb the additional bond supply. I expect the impact to be limited which would allow us to gradually increase the 15 billion to ultimately 26 billion, implying a full stop to APP (Asset Purchase Programme) reinvestment”.
It’s a long journey, as President Lagarde said.
“A full stop to reinvestment is what I believe should be the end model. But I also think we should go there cautiously and gradually, because we have never done it before. With interest rates having moved back into positive territory, it is my impression that there is a lot of renewed demand for European sovereign risk. A lot of private demand from inside and outside the Euro Area. I therefore believe that the market will be able to absorb the QT on top of the primary issuance”.
Do you see any credit crunch risks?
“This is something that we are also monitor closely. We look at the actual credit flow data, we have our monthly bank lending survey. At this moment, we do not see any risk of a credit crunch. In the past we have also demonstrated that we have the tools available to deal with any unwarranted impediment to credit supply. Again, I do not see any evidence that we would need to re-activate these instruments anytime soon because there is still a healthy flow of credit to the real economy. But if we have to deal with it, we know how to do it».
What's your attitude towards cutting the small euro cents?
“We have already done it in the Netherlands. The transaction costs simply outweighed the benefits. Now the five-cent coin is the smallest one that you will find in the Netherlands. When I come back from my annual summer vacation to Italy, I always find these one and two cents in my wallet and, quite frankly, I don’t know what to do with them”.
Italy wants to raise the cash threshold well beyond 3000 euros. Are they in favour of lower or higher levels?
“I would not be in favour of raising it beyond such levels. It is not a good move if you want to counter the black or informal economy. It is useful to have an upper limit to the amount with which we can pay with cash as long as it is proportionate and effective”.
What’s your threshold?
“There is currently a legislative proposal for a limit of 3000 euros”.
The European Systemic Risk Board (ESRB) issued its very first general warning in September. Has the situation changed? Or is it still worrying?
“Clearly, the ESRB has as core objective to signal systemic risks on the horizon in Europe. And we did see the outlook for financial stability deteriorating around the middle of the year in the midst of the energy crisis, inflationary pressures and tightening financial conditions. Then it makes sense to signal to the banks: “Be careful with your profit distributions. Be careful with your dividend payments”. It is also a warning more generally to supervisors, policymakers, and governments about the changing economic conditions and their impact on for example the housing market, about being careful with over crediting. And for the /banks, in terms of the credit risks they take on with respect to mortgages. That may be less of an issue in Italy, but for instance in the Netherlands, high household debt is always something to monitor closely. I think that the ESRB warning is still relevant. There is better news on the economy, and that could mean better news on credit quality in the banking books. But then again, the outlook is clouded by uncertainty and the valuation in financial markets is still pretty high. So that is why the ESRB rightly took up its role and issued this general warning”.
There's a new phenomenon, especially in Italy and in Spain. It’s called BNPL, “Buy now and pay later”. Is this a threat?
“That is the territory of the Authority for Financial Markets in the Netherlands, which is the conduct supervisor. But of course, we also watch this with a healthy dose of suspicion. It creates the illusion that you have a free good, and then only later, you find out that there was also a debt associated with it. We believe it is much better that when you do a transaction, you immediately understand that there is also a liability to it. Credit cards can play a useful role until people find out they may have taken on too much credit and have become financially vulnerable”.
What about the consensus in the Governing Council?
“Madame Lagarde is a very inclusive leader. The way she manages the Governing Council is exemplary. I have a lot of respect for the way she always maintains an open mind. She makes sure that all views are being heard, that all arguments will be given the floor to be aired”.
No divisions at all?
“Of course, at the end of the day, we must decide which arguments to prioritize over the other ones. One cannot accept all arguments, but at least one can listen to them, articulate the counterarguments and make sure that both sides are taken seriously. She also happens to be very respectful in this regard. And at the end of the day, I think that has led to a situation in which the degree of homogeneity in the Governing Council has been quite substantial, even though we had to do very unprecedented things. The Council unanimously decided to launch the Pandemic Emergency Purchase Programme and some really significant TLTRO operations”.
And on rates?
“On the interest rate changes that we have made, there have been a few dissenting opinions here and there, but always on speed or magnitude, never on direction. I think overall the degree of consensus has been quite encouraging. We are one of the very few truly pan-European institutions. It is very important that we find a way at the meeting table to bridge our differences of initial views. And I always say that consensus is not necessarily that everyone fully agrees to the decision. Consensus is that everyone accepts the inevitability of the decision, having heard all the initial views, having been able to exchange all the arguments back and forth, et cetera. That is a process that our President manages very well”.