Davos Watch: Real Interest Rates to Remain at ‘Nothing or Next to Nothing’ & Higher Inflation Target
Inflation expectations in Europe have consistently drifted upwards, and despite rising nominal interest rates, the real rate is likely to be “nothing or next to nothing,” according to Klaas Knot, President of the Central Bank of the Netherlands. Meanwhile, a professor said that 3% is a more appropriate inflation target than the 2% that is common today.
Commenting on the interest rate increases that have been seen this year, and that are expected to continue at least for the remainder of the year, Knot stressed that rates will not rise above the level of inflation.
“Even if there is some tightening of financing conditions and nominal interest rates, real interest rates will go from very very deeply negative, to nothing or next to nothing,” the Dutch central banker said.
The comments were made during a panel discussion on inflation at the World Economic Forum in Davos, Switzerland on Wednesday.
Knot added in the discussion that rising interest rates now is necessary in order to tackle inflation, which he described as “pretty high” both in the US and Europe. It is also necessary in order to bring down inflation expectations, Knot explained, noting that these have consistently drifted upwards as Europe has come out of the pandemic.
Speaking in the same panel, Jason Furman, Aetna Professor of the Practice of Economic Policy at Harvard University, said the inflation target should ideally be higher today than 20 years ago.
The reason for this, according to Furman, is that “the equilibrium interest rate is much lower than it used to be.” This in turn means that the amount of room available to cut interest rates in a recession is “less than it used to be,” the professor said.
And while he said methods such as quantitative easing,
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