‘I have previously indicated that the liability is 6-7% salary margin. If the central bank does not receive help from the social partners and the government to control inflation, interest rates will have to be raised, which will limit all forms of spending. We will therefore be faced with stubborn long-term inflation that will require much more aggressive monetary policy,’ Knot said on the Buitenhof TV programme.
To fight inflation in such a situation, he believes that interest rates will have to be raised to such an extent that the economy could end up in a recession.
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The European Central Bank (ECB) raised interest rates again last week in the fight against high inflation. It was less difficult than before. A quarter of a percentage point was added versus a half of a percentage point the previous time.
“Politics works”
According to Knot, this has an effect. ‘We see the policy starting to work. Lending to citizens and businesses is becoming more difficult. We see that the real estate market is starting to turn around. Our policy works with a certain delay, the greatest effects of what has been done so far are yet to come”, explains the president of the ECB.
However, Knot does not rule out that if inflation is not brought under control, interest rates will be raised further to 5% or more. He points out that this is not the expectation. “Where will we end up in Europe, I can’t say anything about it at the moment.”
The cuts are not enough
According to Knot, even the cuts announced by the cabinet in the Spring Memorandum are not enough. “They’re a useful first step,” says the DNB president. On the other hand, he thinks Minister Kaag (Finance), Prime Minister Rutte and the rest of the cabinet deserve a “compliment”.
‘Clearly the free money policy has been ended. Future expenses will simply have to be covered by the budget, in a sane and orderly way. But it won’t be enough because the current fiscal position is still too weak relative to the state of our overheated economy.’
According to Knot, the cabinet should now make room for setbacks. ‘From this level, the economy can only get worse. I still see too little room for setbacks.’ That means the cabinet would have to consider fresh cuts in subsequent budget discussions, according to Knot.
‘I don’t think it will stop there. Furthermore, it is not satisfactory to have a deficit of 3.7 per cent going forward. The cabinet shouldn’t be satisfied with that,’ says Knot.