ECB/Knot: The Need for the ECB to Distinguish Between Policy and Transmission Tools

Klaas Knot, the President of the Dutch Central Bank and a policymaker at the European Central Bank (ECB), stated that the ECB needs to make a clearer distinction between the tools used to guide inflation and those aimed at stabilizing financial markets. As the longest-serving member of the ECB Governing Council, Knot suggested in a speech in Paris, “Moving forward, we may want to separate the tools that guide the stance from those that support transmission. It makes sense to separate monetary stance from the protection of monetary transmission, as these operations may need to be applied in opposite directions.” Knot highlighted that the Transmission Protection Instrument, which could be used to control irregular and unwarranted increases in borrowing costs, is a good example of how tools can be differentiated, noting that the mere existence of this backstop has calmed the markets and allowed the ECB to raise interest rates.