Klaas Knot: Regaining control

Speech by Mr Klaas Knot, President of the Netherlands Bank, at the Euro50 Marrakech Roundtable on 'Inflation, Deflation: Looking for price stability in various parts of the world', Marrakech, 13 October 2023.

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

Hello everyone.

Over the past decade, central banks around the world have been particularly challenged in their quest for price stability.

After the Great Recession, inflation rates were low. In response, central banks around the world turned to ultra loose conventional and unconventional monetary policy measures.

This approach succeeded in staving off deflation risks. And once inflation was about to return to target, central banks could start thinking about policy normalization.

But then the pandemic hit us.

And soon enough, central banks, all over the world, had to deal with a roller coaster of lockdowns, fear of deflation, followed by a steep rise of inflation and, most recently, some encouraging signs of disinflation.

But the impact of that roller coaster, and the way central banks dealt with it, differed significantly between countries or regions. Like the euro area and the US – which is today's topic.

When the pandemic hit, the economic starting positions of the US and the euro area were different.

The US recovered earlier from the Great Recession than the euro area. This allowed the Fed to implement its first rate hike as early as December 2015. According to its statement, the FOMC was 'reasonably confident that inflation will rise, over the medium term, to its two percent objective.' By contrast, by the time the pandemic hit the euro area in February 2020, core inflation was still only a little higher than one percent. This is illustrated on slide 2 lhs.