ECB/Knot: Supply Shocks Should Be Closely Monitored

Foreks - Klaas Knot, a member of the ECB Governing Council, stated that the European Central Bank may overlook supply shocks that drive prices up as long as inflation expectations remain stable, but should respond strongly if there is a risk of severe deviation. In a statement made on Thursday, he said, "As long as inflation expectations are anchored, it may be appropriate for monetary policy to look beyond temporary supply shocks, but to return aggressively when the risk of unanchoring increases." However, Knot called for a stricter distinction between the tools that guide the monetary policy stance and those that support the transmission of policy, stating, "Such a new principle of distinction for our toolkit would mean less scope for hybrid tools outside the effective lower bound."