The President of the Dutch central bank, Klaas Knot, has stated that underlying price pressures in the euro zone may pose challenges, although monetary policy is exhibiting signs of effectiveness. He emphasizes the need for gradual rate hikes to tame inflation. The European Central Bank (ECB) has already raised rates by a significant margin in the past year to combat rising inflation.

However, the end of this aggressive tightening cycle, which marks a historic period for the ECB, is drawing near. In his speech, Knot acknowledges that persistent inflationary pressures exist due to prolonged high inflation rates.

Knot highlights that underlying inflation, excluding fuel and food prices, slightly decreased to 5.3% from 5.6% last month. However, ECB chief Christine Lagarde warned that core price growth has not yet shown signs of peaking. Knot agrees that price pressures in certain sectors will be challenging to reduce, as they have accumulated over a prolonged period. This suggests that further efforts will be required to rein in inflation in these areas.

Despite the challenges, Knot expresses cautious optimism, stating that the worst of Europe’s inflation issues are behind them. He mentions that longer-term inflation expectations are reasonably stable and believes there is growing evidence that the ECB’s policy measures are working. Knot, known for his firm stance on policy, finds reassurance in the initial impact of the recent monetary policy on the real economy. He observes rising borrowing costs for both firms and households, as well as indicators like the drop in house prices, signaling the influence of the ECB’s measures.

While Knot does not reiterate his call for rate hikes in June and July, he emphasizes that the ECB will continue raising rates until inflation returns to 2% over the medium term. However, he stresses the importance of caution in implementing further steps. As rates increase, their impact becomes more forceful, especially considering that the full effect of previous rate adjustments has yet to materialize. Knot acknowledges the need to prioritize stability concerns, as the financial system must adapt to higher interest rates.

Klaas Knot’s remarks shed light on the ongoing challenges faced by the euro zone in taming inflationary pressures. He acknowledges the difficulties in reducing price pressures in certain sectors while expressing cautious optimism about the effectiveness of the ECB’s monetary policy. Knot emphasizes the need for gradual rate hikes, considering the yet-to-be-seen effects of previous adjustments. Additionally, he highlights the importance of stability and the financial system’s ability to adapt to higher interest rates. These insights provide valuable perspectives on the current state of the euro zone’s economy and the ECB’s approach to managing inflation.