De Nederlandsche Bank (DNB) published a speech by Governor Klaas Knot, delivered at the Peterson Institute in Washington, on how heightened trade-policy uncertainty and a prospective rise in euro area defence spending could reshape the inflation outlook and the European Central Bank’s (ECB) policy path. Knot pointed to the ECB’s recent 25 basis point rate cut to 2.25% as insurance against near-term downside risks to growth and inflation, while arguing that policy should remain data-dependent and oriented toward a broadly neutral setting over the medium term. He also signalled increased support for a stronger international role for the euro. DNB modelling cited in the speech suggested a 25% US tariff on European imports would reduce euro area growth by about 0.3 percentage points, with the main drag around the second year and a persistent output loss, while inflation effects could shift from a short-term rise to lower inflation after about a year as demand weakens. Market moves were described as complicating the near-term inflation picture, with euro appreciation and lower energy prices potentially offsetting tariff-related pressures, but with medium-term upside risks from supply-chain disruptions, retaliatory tariffs and fiscal expansion, including Germany’s lifting of its debt brake and wider defence spending plans amid tight labour markets. On the euro’s global use, Knot argued that greater euro invoicing and demand for euro-denominated safe assets could reduce exposure to exchange-rate shocks and lower financing costs, pointing to foreign absorption of government bonds during ECB quantitative tightening, and he highlighted deepening the EU internal market and capital markets, harmonising cross-border rules, and potentially expanding common safe-asset issuance such as eurobonds, alongside a warning that any increase in common debt should remain consistent with sustainable public finances and time- and scope-limited fiscal exceptions for defence spending.
De Nederlandsche Bank 2025-04-23
De Nederlandsche Bank’s Klaas Knot backs a data-dependent ECB stance after a 25 basis point cut and calls for strengthening the euro’s international role
De Nederlandsche Bank Governor Klaas Knot, in a speech at the Peterson Institute, discussed trade-policy uncertainty and increased euro area defence spending's impact on inflation and the ECB's policy. Knot highlighted the ECB's recent 25 basis point rate cut to 2.25% as a precaution against downside risks, advocating for data-dependent and neutral policy settings. He also emphasized the benefits of a stronger international role for the euro, including reduced exchange-rate shock exposure and lower financing costs.