ECB to start rate hike discussions in January: Knot

By Bart H. Meijer

AMSTERDAM (Reuters) – The European Central Bank (ECB) will have to start discussing the timing of an interest rate hike in January, while the risks related to ultra-loose financial conditions continue to rise, Dutch central bank governor Klaas Knot said on Monday.

“No one can expect the current accommodative financial conditions to remain for long. And when they change it will become apparent who took on too much debt,” the Dutch member of the ECB’s governing council said.

Knot cited the recent turmoil in Turkey and Argentina as evidence of how fast financial conditions could change, and warned that “a turnaround is possible in developed countries too.”

A decade of cheap money has stimulated people and companies to take on more debt than ever, Knot said, while limiting incentives to pay off debts.

This risk-seeking behavior could lead to damaging losses as escalating trade tensions, a hard Brexit or U.S. interest rates rising faster than expected could all trigger a “sharp correction” on financial markets, the Dutch central bank warned in its biannual financial stability report.

ECB TO NORMALIZE POLICY

Meanwhile, the ECB will continue to “cautiously normalize” its monetary policy, Knot said, meaning first of all that the bank will end its asset purchases at the end of this year.

“I see no reason not to do this and I don’t expect any reason will appear”, he said.

The bank halved its net purchases of bonds this month, to 15 billion euros ($17.2 billion) per month. It said it would maintain this pace until the end of December, after which the program was expected to end.

ECB governors will then start discussing the timing of the bank’s first interest rate hike since 2011, Knot said.

He stood by the ECB’s current guidance that interest rates would remain at their current, record-low level through next summer, but said this was only an expectation.

“And as any statistician knows, an expectation represents the midpoint in a collection of outcomes, and always holds the possibility of other outcomes to the left or the right of that point.”

Concerns over the Italian budget, which made the country’s borrowing costs soar on Monday while bank stocks tumbled and the euro weakened, had not changed the outlook for monetary policy, Knot said.

“The ECB is not there to correct or compensate purely national policies,” he told Germany’s Boersen-Zeitung in an interview. “Crucial for us is the euro area inflation outlook, and this seems unaffected thus far.”

($1 = 0.8713 euros)

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.