Given uncertainty, Knot says ECB inflation policy should be reconsidered

September 23, 2019
AMSTERDAM (Reuters) – The European Central Bank should consider a broader inflation target, Dutch central bank governor and ECB governing council member Klaas Knot said in parliament on Monday, renewing his criticism of current ECB policy.
Summoned to answer questions from Dutch lawmakers, Knot again said he opposed aspects of the ECB’s ultra-loose monetary policy, saying some stimulus measures announced by the bank this month are “disproportionate”.
Discussing the ECB’s inflation target of aiming for inflation near but slightly below 2 percent in the medium to long term, Knot said that it might make sense for policymakers to consider a “broader bandwidth of inflation outcomes”, given the uncertainty about the impact of policies such as negative interest rates and open-ended bond purchasing.

“We should have a good talk about what the ‘mid to long term’ is, and I think in addition we should talk about with what precision we should try to achieve our inflation aims,” he said, without elaborating on what figure or time-frame he would advocate.
He said central bank policies were one reason for low and negative rates, but probably not the most important factor.
“The dominant factor really is the decline in interest rates in the capital markets,” the president of the Dutch central bank said of the global phenomenon.
For the Dutch economy, he said the country had waited too long in reforming its pension system, one of the world’s largest on a relative basis.
“I think we have no other choice but to accept that the low and negative rates will be with us for a long time, and so we have to change our pension system to accommodate that. We are late, we should have done that 10 years ago,” he said.
Dutch pension funds, including the 464 billion euro ABP fund, are preparing to cut pensions next year, though the issue is explosive in domestic politics and the cuts may yet be halted.
Knot said delaying moves to reduce pensions would amount to an “intergenerational transfer” of wealth from younger to older people.
He also responded to criticism, including from ECB President Mario Draghi that the Netherlands and Germany should loosen fiscal policy.
Knot acknowledged that might be better for the European economy as a whole, but not necessarily for the Dutch — this year.
However, he said it would make sense for the Dutch, whose debt as a percentage of GDP has fallen below 50%, to consider more spending measures in the future.
“In an economy with a surplus of savings such as the Dutch economy, with a national debt of between 40-50%, there’s no reason to bring the debt lower,” he said.
“There is just room in the budget,” he said, adding that it might make sense to invest more in infrastructure.

(Reporting by Bart Meijer, Anthony Deutsch and Toby Sterling; Editing by Alison Williams)

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