Klaas Knot: International spillovers and the ECB's monetary policy

Introductory remarks by Mr Klaas Knot, President of the Netherlands Bank, at a panel of the CF40, Euro50 Group and Peterson Institute for International Economics (PIIE) conference on "The Dollar, the Euro and the Renminbi in the new geopolitical environment", 27 March 2021.

The views expressed in this speech are those of the speaker and not the view of the BIS.

1. Setting the stage

• In my remarks, I want to discuss the international setting within which monetary policy inevitably will have to be assessed. In that regard, I will also focus on the role of international spillovers in the conduct of ECB's monetary policy.
• To set the stage, let me review the recent developments in the US. Then I will address the question how higher US inflation expectations and bond yields affect euro area financing conditions and how this relates to the ECB's policy response.

2. US financial market developments

• Perhaps the most widely debated topic within financial markets over the last weeks centers around the effects of the fiscal package passed by the Biden administration. As a result, market participants have taken into account the possibility of a high inflation scenario once again. This is – amongst others – reflected in the slope of the US yield curve, as measured by the spread between 10-year and 2-year rates. This spread currently resides at its steepest level since 2015.
• The recent steepening is, in fact, a story of two tales. In the short end of the curve the Federal Reserve's commitment to keep front-end rates lower for longer plays an important role. Simultaneously the upward pressure on the longer end signals a brighter economic outlook, which is – at least in part –driven by the surprisingly large fiscal stimulus package.