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The European Central Bank should continue with half-point interest-rate increases at the next two meetings and the time to slow the pace of hikes is “still far away,” according to Governing Council member Klaas Knot. 

“We made a step down in December from 75 to 50 basis points — that will be the pace for a multiple number of meetings,” Knot told La Stampa in an interview. “So that means at least the two in February and March,” he said. “I do think that we will continue to be in tightening mode until the summer.”

At some point in the first half, risks to the inflation outlook will become more balanced, Knot said. That would be the moment for the ECB to become more nuanced in its policy response.

“That would also be a time in which we could make a further step down from 50 to 25 basis points,” according to Knot. “But we are still far away from that. I want to re-emphasize that this is not in sight for the upcoming meetings.”

The hawkish Dutch central bank chief already made the case for continued ECB tightening last week, arguing that underlying inflation is still rising, even as the headline measure slows. 

Speaking in a separate WNL interview on Sunday, Knot reiterated that message, saying “something will follow in May and June” without specifying what size of rate hikes he was envisioning.

Officials in 2022 raised the deposit rate by 250 basis points to 2% and economists in a Bloomberg survey see them peaking at 3.25% by summer. Still, some officials consider slowing the pace of tightening as price pressures ease and energy costs drop, according to people familiar with their thinking.

“In the December data, we saw a first decline in headline inflation, but that was entirely due to base effects and lower energy inflation,” Knot said. “We focus on core inflation where, unfortunately, there is no good news. Because it is still on the rise. Underlying inflationary pressures show no signs of abating yet.”

He isn’t alone in his pushback against taking the foot off the gas too quickly. ECB President Christine Lagarde told the World Economic Forum in Davos that policy makers would “stay the course,” and the central bank chiefs of Austria and Finland made a similar case in recent days.

“At this moment, the risk that we have to manage is the risk that we do too little, not too much,” Knot said. 

Turning to quantitative tightening, which is set to start in March, Knot said he expects the “impact to be limited which would allow us to gradually increase the €15 billion to ultimately €26 billion.” This would imply a complete halt of reinvestments for the ECB’s Asset Purchase Program, he added.

“I also think we should go there cautiously and gradually, because we have never done it before,” the Dutch governor said. 

(Updates with additional Knot comments in third paragraph)

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