ECB official plays down need to cut rates despite rise in loan costs
EUROPEAN Central Bank Governing Council member Klaas Knot said he doesn't see any immediate need to cut benchmark EU interest rates despite a jump in short-term borrowing costs for banks. This benchmark rate affects the cost at which consumers can borrow all over Europe.
"Why we are still seeing volatility is a bit of a puzzle for me because there needs to be a distortion somewhere in the market," Mr Knot said in an interview over the weekend at the World Economic Forum in Davos, Switzerland.
"I don't have a conclusive answer; I don't think anybody has. I would argue we would need to understand the drivers better before we could come to a conclusion that this would warrant policy action."
The cost of overnight unsecured lending among banks rose as high as 0.36pc on January 20, from less than 0.1pc two weeks earlier, boosting speculation that ECB policy makers would react when they next convene on February 6. At the same time, economic data is signalling that the ECB's current record-low rates, abundant central-bank liquidity and government reforms may be sufficient to foster growth in the 18-nation currency bloc.
The ECB cut its benchmark rate a quarter point to 0.25pc in November and kept the deposit rate at zero. But banks, including Barclays, Royal Bank of Canada and Commerzbank have been predicting the ECB will cut rates even further soon, amid concerns that the rise in market borrowing costs threatens the euro area's recovery.
"It would need an adverse shock for further action to be taken – at this moment I don't see such a development," said Mr Knot (46), who is also president of the Dutch central bank.
Mr Knot also played down concerns that low inflation in the euro area would turn into falling prices that could derail the economy. Inflation in the currency bloc slid as low as 0.7pc in October. "Inflation expectations are solidly anchored. . . I'm not very worried about it," he added.