© Reuters. Financial Stability Board (FSB) Chair Klaas Knot attends a family photo session at the G7 Finance Ministers and Central Bank Governors' meeting in Niigata, Japan, May 12, 2023. REUTERS/Issei Kato (Reuters) - Investor bets for European Central Bank rate cuts are excessive and possibly self defeating because they could actually hold back monetary easing, Dutch central bank chief Klaas Knot told CNBC on Wednesday.
Markets are betting on 140 basis points of rate cuts from the ECB this year - a drop from 150 basis points priced on Tuesday - with the first move in March or April, a timeline several other policymakers have also called out.
"Markets are getting ahead of themselves," Knot told CNBC. "We are optimistic that we have a credible prospect of a return of inflation to 2% in 2025 but a lot still needs to go well for that to happen."
Knot also warned that the more the market eases financing conditions, thus undoing the central bank's work, the more likely it could delay actual rate cuts.
"The more easing the markets has already done for us, the less likely we will cut rates, the less likely we'll add to it," Knot said. "There are expectations of our policy rate movements in current markets we will not vindicate."
He warned that the labour market was "incredibly" tight and geopolitical risk also adds to inflation risks.
"If we are going to remove some of the restrictions that we currently have in place, it will be a very gradual pullback, but not a head over heels pullback, and we definitely will need more wage data on wages," Knot said.
Speaking to Bloomberg TV, ECB President Christine Lagarde said the ECB would be in a position by "late spring" to review data from 2024 collective agreements and assess where household incomes were going.
Her comments echo a similar message from chief economist Philip Lane, who earlier said that the June meeting would be the first when the ECB could assess first quarter wage developments' impact on inflation.
Echoing some of Knot's message, Lagarde said that incorrect market pricing of rate cuts would be unhelpful.
"It is not helping our fight against inflation if the anticipation is such that they are way too high compared with what's likely to happen."
Lagarde said that the ECB was on the right path to get inflation back to 2% but she was not yet ready to declare victory.
