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Klaas Knot on ECB Tapering: “We'll See.”

By: C.Jay Engel

With the Fed continuing to portray a “hawkish” message, focused on three or four 2017 rate hikes, the ECB is too having to decide whether their easing policy should be cut back. The Fed began its tapering of (official) QE years ago and is therefore now onto rate hikes and balance sheet efforts. The ECB, however, is still heavily in asset-purchasing mode.

In a recent interview with the the Wall Street Journal, Dutch central bank governor Klaas Knot, made it clear: Euro area interest rate hikes are not going to take place until the asset purchase program has been brought to a close.


The question you raise is about rates. Our forward guidance is pretty clear on this front. It states that we will first end the net purchase phase of the asset purchases, and only then begin to lift off interest rates. That forward guidance reflects also the experience that other central banks like the Federal Reserve and the Bank of England have gained in this context. There is a certain logic, I would say, in that sequence, a logic that also applies to the eurozone. So for the moment I don’t see a need to revisit that logic.

In other words, the ECB is much further behind the Fed on the path toward interest rate “normalization.” Normalization, of course, being a misleading code word for slightly tinkering with an interest rate target that is basically economically meaningless.

Knot continues with the classic central banker position of [my paraphrase] “everything is great, but we need more inflation.” It’s the balance of making sure everyone knows the swell job the bankers are doing, but at the same time that their heroic efforts are still needed.

When asked how close they were to completely halting the purchase of assets, Knot merely replied: “we’ll simply have to see where the situation is.” That is, they really don’t know. At the same time, Knot claims that “what we have to do is be as predictable as possible.” If this seems to be confused sentiment, Knot also says: “I don’t want to express myself in absolute terms.” Obviously.

What has been dubbed “FedSpeak” is simply “Central Bank speak.” Central bankers all over the world don’t know what’s going on, they don’t know how to steer an economy. No one does, of course, as only the market actions of individuals can reveal the price of money and the proper allocation of capital. But instead of letting go, they try to appear knowledgeable and perfectly in control. 

The problem is, few actually believe them anymore, despite the tremendous efforts of financial media.

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