Interview Klaas Knot met de Financial Times

Interview Klaas Knot with the Financial Times

Klaas Knot spoke with Olaf Storbeck and Martin Arnold from the Financial Times about his 14 years as president of De Nederlandsche Bank. The article was published on 27 June 2025.

This is the full transcript of the interview:

FT: Since you took office in July 2011, you've seen quite a lot of turmoil and crises: the euro crisis, the pandemic, the Ukraine war, the inflation surge. At which point have you been most worried, and why?

Knot: I have had worries at several points. My first was the euro area debt crisis, when there were worries about whether the euro would survive. Mario Draghi's famous “whatever it takes” put that issue to rest: while it did not solve the crisis, the continuation of the euro was no longer in question after that.

There is an inherent vulnerability in having a single currency and national debt issuance: it creates spreads between sovereign bonds, while effective monetary policy requires homogeneity of monetary transmission.

“Whatever it takes” and the outright monetary transactions revealed acceptance that homogeneity of monetary transmission cannot be separated from taking some form of lender of last resort role in sovereign bond markets. Mario Draghi showed us all that these things cannot be separated, and that the ECB will have to accept this role if it is to pursue its own mandate of fulfilling price stability within the euro area. So that was the first crisis on which I had worries.

The second crisis was the pandemic, and that was completely unprecedented. It was a negative supply shock and a negative demand shock at the same time. We had to come to an assessment of the time profile of these two shocks and there was hardly any historical evidence to compare it with.

And then, of course, we had high inflation. Firstly, we underestimated the strength of the recovery coming out of the pandemic. Then we got Russia's barbaric invasion of Ukraine and the explosion of gas prices, which was again an unprecedented cocktail. The governing council was absolutely determined, and I never doubted that we would be able to master inflation, but I have been positively surprised that the cost of fighting inflation has been so low this time around compared to the last time when we had such an enormous bout of inflation during the 1970s. The loss in purchasing power that was there for a couple of years was of course real and painful, but in terms of recession and unemployment, the cost of fighting inflation this time was much smaller than we might have feared beforehand.

FT: Did the governing council at the time think that the battle against inflation could be extremely painful?

Knot: Well, if inflation gets out of hand and you have to hike interest rates at a relatively fast pace, you always know that this will have a negative impact on economic activity. It could also have had negative effects on financial stability, but luckily these were also dogs that didn't bark.

But we could not have anticipated that we would be able to reduce inflation at full employment, which was quite unprecedented. That has been a positive surprise. We would have been prepared to accept more economic pain, but luckily we didn't have to.

FT: How concerned are you about fiscal dominance?

Knot: Despite all the fears on fiscal dominance, the ECB has been able to fulfil its mandate of price stability over the medium term. At the same time, instruments like OMT and the TPI have been indispensable to enable this rapid monetary tightening phase that was necessary to bring inflation back to target. In that sense, it's the inherent vulnerability that is there if you are in a currency union but still have predominantly national debt issuance.

FT: Other hawkish voices in the governing council have a more critical view on those QE instruments.

Knot: I publicly supported the OMT already in 2012. I did that after having lived through the period, let's say, 2011 up to July 2012, when we tried lots of things: TLTROS, communication, talking to the governments, etcetera. And each time the crisis came back.

That was when I realized that, if you are a central banker in an incomplete monetary union, you have to accept that homogeneity of monetary transmission cannot be separated from the lender of last resort role. And that's why I accepted the OMT. It was not unconditional, but with safeguards in place, I was in full support, and I recognized very quickly the brilliance of the comments that Mario Draghi had made. It really was a game changer at that time, as history has proven.

FT: You said that the Governing Council may have underestimated the strength of the economic recovery coming out of the pandemic. Do you think that you overdid it with asset purchases, and did that contribute to the surge in inflation?

Knot: I do think we underestimated the strength of the recovery and thereby the persistence of the inflation that began to manifest in the second half of 2021. With the benefit of hindsight, I think we remained in crisis mode a little bit too long and probably the end of net purchases came quite late.

This is also because asset purchases lack nimbleness: once you're in, you can't get out very quickly without potentially creating financial turbulence. We had to use the first half of 2022 to wind down asset purchases before we finally got to lift interest rates in July 2022. Ideally, we would have been in the position to lift interest rates a little bit earlier.

That being said, at the end of 2021, [we still had] big uncertainty and lockdowns were still in place. And secondly, the very big inflation shock at that time was of course Russia's invasion of Ukraine. Before that, inflation was slightly above 2%. And finally, once we started lifting interest rates, we raised by 50, then 75, so that very quickly we caught up.

I do think we could have acted a little more nimbly in 2021, but I don't believe that it would have mattered a lot since the biggest contributor to inflation was the energy price shock and that we did react to quite strongly.

FT:  Some economists say that the last quarter point increase in September 2023 was not necessary and that the ECB could have eased earlier.

Knot: I disagree. We decided to hike from an insurance perspective, because after such a huge bout of inflation we did not want to err on the side of taking our foot from the brake too early.

If you look at where we are today, we did enough to make sure that inflation would indeed go down, and we removed the restriction in a timely manner and so as to avoid a structural inflation undershoot.

Today, our outlook is telling us that inflation is around target. Policy is neutral and the risks surrounding this inflation outlook are clearly two-sided. That's a good place to be, regardless of what the future will bring. There may be all kinds of terrible uncertainties, but the starting point from which the ECB can confront these future challenges is probably close to the optimal one.

FT: Markets are currently expecting another one more quarter point rate cut by the end of the year. Do you think that's a fair assessment?

Knot: It's difficult for me to exclude that, but I would note that in the June projections, inflation was more or less stabilising around target. We had a small dip  in headline inflation in our projections in 2026, but that was mainly due to the decline in energy prices and recent developments have put into question whether that will really take place. So I think it's too early to say whether this should be on the table or not.

FT: But you say you wouldn't exclude it from today's perspective.

Knot: I've left the governing council, so it's not my role anymore to include or to exclude anything. But if I was still a monetary policy maker, clearly in this highly uncertain world I don't think you should exclude things before you have a decent analysis of what the new situation means in terms of the inflation outlook, which would normally take us to September, and then I would be open-minded. We have to focus on the medium-term outlook for inflation and I believe that at this moment, the risks are two-sided.

FT: If we do end up in a more fragmented global economy, with higher trade barriers and higher tariffs, what's the impact on monetary policy?

Knot: That depends on the relative weight of the factors. In the short run, trade tensions create significant uncertainty, which weighs on investment and consumption. It’s a negative demand shock that means lower growth and probably also lower inflation. But that is also in our projections.

In the medium run, if these trade tensions really lead to a reconfiguration of global value chains it's not so clear whether the traditional approach, where a country imposing tariffs gets confronted with higher inflation and a country on the receiving end gets confronted with lower inflation, will still be true. It may well be that for every country that is involved in this global value chain, the outcome may be a negative supply shock. And therefore, I'm not so sure that over the medium term, even though we will be on the receiving end, that it is necessarily deflationary for us.

Then of course we have to form an opinion on fiscal policy and how real the increase in defence and infrastructure spending in Germany will be and whether that will also be inflationary. There are also arguments on either side of this debate. If a lot of that impulse comes into Germany, where the output gap is  larger than in other parts of the Euro area, then that may also mute the inflationary effect a little bit. But we don't know.

FT: How should central bankers respond to this?

Knot: I think the ECB needs a little bit of time now, because we are confronted with a combination of a negative demand and a negative supply shock. One of the lessons of the pandemic was that it might take the supply side longer to heal than the demand side. I think the best thing now is to take time and to see how these shocks actually play over time.

It may well be that the ECB has to hold rates for quite some time to come, that may be the optimal strategy. I don't know, but I wouldn't exclude that actually being in neutral is not a bad place to be as long as you don't know which way these shocks will actually play out in the medium-term.

I would say that 2% is a nice place to be. If you look at the estimates for neutral, there is some suggesting evidence that R* is a little bit higher now than before the pandemic, so probably 2% is squarely within the range for neutral. If you move to 1.75%, you're probably more a little bit on the lower end. You need to think whether you really want to make that move. That, of course, should only be informed by how the inflation outlook develops.

FT: We talked about how it was remarkable that this surge in inflation and sharp tightening of monetary policy didn't have a higher cost for financial stability. Are we out of the woods on this or do you think that there could still be some fallout?

Knot: I would never make a statement as absolute as that on financial stability. But I would make the following observations. The U.S. banks [affected by the 2023 crisis] were deliberately kept out of the international reform agenda and, in my view, were woefully inadequately capitalized.

Secondly, there have been some tensions in the NBFI space. The UK LDI crisis was an episode. The Financial Stability Board has been focused on strengthening the major players within the NBFI space by making sure that there is better liquidity preparedness for margin calls. Most of the recommendations are still to be implemented and that is still work that needs to be done.

On the interest rate environment, it's the speed, not the level, with which interest rates move that is potentially a problem for financial stability, because banks can then have made longer term commitments on sort of the wrong assumption.

FT: It feels that in a lot of the work that's done in multilateral institutions there are growing divisions between the U.S. and other countries on issues like climate change, crypto assets etcetera. Do you feel like the future of the FSB and the Basel committee is in danger?

Knot: I would not say that. Of course, there are differences of opinion between members on the relative weight that you should attach to the various risks, but we have mature discussions within the FSB on the way forward. And so far, it has not impeded the FSB from executing its mandate. The US is very involved and engaged, and it is well known to the rest of the membership that, of course, this US administration will have a different opinion as to the relative weight of these climate-related financial risks. But this is not something that we cannot deal with. And to this date there has not been a single reference to the possibility of the US withdrawing from the FSB.

FT: With the second Trump administration’s approach to global relationships, could the post-WWII rule-based order of the West be overturned? 

Knot: Well, that's quite an apocalyptic scenario. It’s true that on some issues, it might be more difficult to come to an agreement, but at the end of the day, I think US authorities will recognize that this international order has also served the US pretty well.

Take for instance US banks. They have a global footprint and are profitable everywhere in the world. If there is no global financial supervisory standard, if there is no Basel capital adequacy standard, then the whole debate about regulatory equivalence will have to be reopened and that might lead to a situation in which US institutions will no longer be able to profit from open and mutually accessible markets. That is not in the interest of US banking entities, and it's not in interest of US authorities to allow that to happen.

On trade policies, there are the distributional consequences within societies that have created the backlash against globalization. I don't think [Trump’s trade policy] will bring about the objectives that it has set itself, but I do understand where the resistance is coming from, and what policymakers probably have paid insufficient attention to in the past. But that is not the case when it comes to financial regulation and to having open, mutually accessible financial markets. That has been beneficial to all those that participated.

FT: Do you think that there could be more centralized European debt issuance for programs like defense spending, energy, digitization?

Knot: Yeah, I do. Governments are in the business of providing public goods, and it is pretty clear in today's internationalized world that many of these public goods can be provided more effectively at the European level than at the national level. If you decide to offer these public goods at the European level, then of course you also have to think about European financing arrangements.

In Germany and the Netherlands, this is not a politically generally accepted position. But I do think that central bankers usually should always start from sound economic reasoning, and it makes sense to also be open-minded.

There are certain circumstances within which Eurobonds are logical. My favourite solution, however, would be European taxes, because I think there is already an awful lot of indebtedness in the Euro area economy.

FT: Under this more fragmented world that we seem to be living in, could the role of the dollar come under threat?

Knot: Yes, marginally so. I don't think that stories about dethroning the dollar are very realistic. The advantages that the U.S. still has in terms of being an innovative, dynamic economy where people want to invest will not fade very quickly.

But some of the elements of the current US administration are, to some extent, undermining trust in the US dollar. So on the margin, yes, I do think that there will be some investors reallocating their portfolios, and the euro could be a good alternative. These changes will be very, very slow. But I do think that incrementally, yes, there could be a slight change now.

FT: What's your view on central bank independence in the US? How much under threat is it and how much of a threat for the role of the dollar could it be?

Knot: In the US, central bank independence is actually enshrined in legislation that can only be changed by significant majorities in Congress that I don't think are there at the moment. Other than that, when it comes to central bank independence, I focus on the ECB.

Independence leads to a better anchoring of inflation expectations and a lower cost of disinflation. Compare the cost of  disinflation in the 2020s to the 1970s in terms of output and unemployment. That was in part due to  better anchored inflation expectations, a higher degree of central bank credibility. In part, that probably has something to do with the fact that between the 1970s and the 2020s, central bank independence has become the norm in a much wider group of countries. That degree of anchoring, which was not there in the 1970s, has provided tangible benefits to our societies.

FT: What about crypto?

Knot: We've so far always said that crypto and stablecoins do not have the potential to become systemic because they were still limited in size and limited in interconnectedness with the rest of the financial system. But over time, they have grown in size and become more interconnected with the traditional financial system. This development has made me observe that perhaps we are reaching the tipping point where we should monitor crypto and stablecoins from a financial stability perspective.

We have issued from the FSB side two sets of recommendations in 2023, one for the supervision and regulation of global stablecoin arrangements and one for other crypto assets and markets. These recommendations should be implemented into national law and we should regularly update these regulatory frameworks. These frameworks need to be global because crypto assets can be moved across borders.

FT: The U.S. is really pushing to bring crypto into the heart of mainstream finance and opening up the ability of banks to provide custodial services. There's a very different approach in Europe, and the UK is somewhere in between the two. It doesn't feel like there's a lot of consensus on this. Is that a danger?

Knot: What I have seen from some of the parts of the US Genius Act is that they are actually pretty much in line with the FSB's admittedly high-level recommendations in terms of providing regulatory clarity on who is the regulator, who is the supervisor and what the regulatory frameworks entails. If there is a big deviation of national implementation, then of course that might become problematic, but I wouldn't speculate on that beforehand. I also understand there is the desire to bring stablecoins onshore in the US again. That would be a good thing, in my view.