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".
- 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.
- 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.
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