AMSTERDAM (Reuters) – The European Central Bank (ECB) will likely keep interest rates at their current levels in the coming months, as it waits for further confirmation that inflation is on a downward trend, Dutch ECB governing council member Klaas Knot said on Thursday.
“Personally, and conditional on incoming data confirming the latest projections from September, I see the current level of our policy rates as a good ‘cruising altitude’ where they can remain for some time,” Knot said in a speech in Amsterdam.
“We should be a little patient and not raise rates too much to prevent choking off the economy.”
As the ECB evaluates incoming data to see if its inflation projections hold, the bank is also faced with the challenge of shrinking its balance sheet after years of supporting financial markets with massive bond-buying schemes, Knot said.
So far, markets are absorbing this retreat well, the Dutch central bank governor said, but the ECB’s balance sheet will likely have to remain larger than it was before the global financial crisis.
“The reason is that structural changes in financial markets, including a higher demand for liquidity, will call for larger central bank reserves in the future,” Knot said.
“In my view, refinancing operations represent the most efficient tool to provide such a level of reserves down the road.”
(Reporting by Bart Meijer;Editing by Elaine Hardcastle)
