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Euro zone slowdown not big enough to alter ECB policy - Knot

Euro zone slowdown not big enough to alter ECB policy - Knot
FILE PHOTO: Klaas Knot, President of the De Nederlandsche Bank, attends the 2016 Institute of International Finance (IIF) Spring Membership meeting in Madrid, Spain, May 25, 2016. REUTERS/Susana Vera -/File Photo   -   Copyright  Susana Vera(Reuters)
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FRANKFURT (Reuters) – The weakness in euro zone economic growth is not significant enough for the European Central Bank to alter its policy path, even if the outlook remains uncertain, Dutch policymaker Klaas Knot said on Wednesday.

Growth slowed to a quarterly 0.2 percent in the third quarter as the German economy contracted, raising fears that the currency bloc’s five-year expansion may be coming to an end just as the ECB plans to dial back stimulus.

“At this point in time, the impact is not such that it would take us to fundamentally change our outlook,” Knot, a hawk on the ECB’s Governing Council, told CNBC television.

He pointed to high capacity utilisation, a tight labour market and years of growth in excess of potential as signs that the bloc is now more resilient than earlier.

Knot declined to say when the ECB would raise interest rates from record lows. Keeping them steady until next summer was the bank’s expectation, not a commitment, he said, and the actual outcome could be on “either side” of this expectation.

“The market is acknowledging that the interest rate has become our instrument of marginal policy adjustment,” Knot said. “So it’s unsurprising that economic news about the euro area… gets reflected in expectations of our first rate hike.”

He also dismissed the suggestion that the ECB would change policy to help Italy, which is facing rising borrowing costs as it is locked into a budget dispute with the European Commission.

“It’s quite pertinent that Italy actually complies with the rules,” Knot said. “If it doesn’t, the result is that spread will go up.”

He also said any contagion from rising Italian debt yields has so far been limited and thus requires no action from the ECB.

“We’re not seeing an overall deterioration in credit conditions, we’re not seeing an overall deterioration in financial conditions,” he said. “Those would have to be the kind of things that we would first have to see before we could contemplate changing our course of action.”

(Reporting by Balazs Koranyi; Editing by Francesco Canepa and David Stamp)

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