ECB’s hawkish Knot makes dovish sounds on rates long-term

Sign of the European central Bank (ECB) is seen ahead of the news conference on the outcome of the Governing Council meeting, outside the ECB headquarters in Frankfurt, Germany, March 7, 2019. REUTERS/Kai Pfaffenbach

BERLIN (Reuters) – Dutch central bank Governor Klaas Knot expects the euro zone economy to recover speed in the second half after a sluggish start to the year, but in an interview with Handelsblatt the noted hawk was distinctly dovish on long-term interest rates.

Knot, one of the most prominent hawks on the European Central Bank’s rate-setting committee told the German paper that though he was strongly in favour of normalising policy after years of anti-crisis measures, it was clear that even afterwards interest rates would be lower than before the crisis.

“It is clear that there has been a cooling off,” he said of the slack start to the year. “But there is no recession or crisis,” he said, adding that robust demand and rising wages suggested growth would soon pick up again.

He also repeated his scepticism about multi-tiered deposit rates to help well-capitalised banks with excess liquidity, saying he would need to see clear evidence that negative interest rates were hurting lending to the real economy. [L8N21F44P]

Details for a new tranche of long-term ECB bank financing would be announced in June or July, he said, adding that conditions for the financing would likely be stricter than previously.

“I see the news programme, TLTRO III, as a bridge … to ease the transition to market financing,” he said. “The new programme’s conditions will be less advantageous than before… We should avoid us needing to discuss a TLRO IV or V in a few years’ time.”

He also issued a warning that markets had not yet fully priced in the potential impact of a disorderly Brexit on Britain’s currency.

“If that happens, there is a potential for significant repricing in the markets and pound sterling would come under pressure,” he told the newspaper, according to the Dutch central bank which said this was Knot’s original comment in English.

In the interview published on Sunday, Handelsblatt used a German word meaning “revaluation” to translate the word “repricing”.

Reporting by Thomas Escritt; Editing by Raissa Kasolowsky and Edmund Blair

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