Speech Klaas Knot - "Spreading our wings. How
monetary and fiscal policy can fight inflation"
23 september 2022
Algemeen
"The job for central bankers is clear. Like on the painting, we will rise up,
fiercely spread our wings, and protect our eggs from the menacing mongrel
of inflation," said Klaas Knot, referring to "The Threatened Swan" at the
informal dinner of the Economic and Financial Committee at the
Rijksmuseum.
"For many of us here tonight, the dog in the water is inflation. For
others, it is the energy crisis. The refugee crisis. The climate crisis. The
pandemic. An atrocious war on European soil."
Klaas Knot
President , De Nederlandsche Bank
Datum: 23 september 2022
Spreker: Klaas Knot
Locatie: Rijksmuseum, Amsterdam
Good evening, distinguished members of the Economic and Financial Committee.
From me too: welcome to the Rijksmuseum.
The most famous painting in this impressive museum is probably the one right behind me.
The Night Watch.
But right here in this beautiful gallery, you will also find the very first painting the
Rijksmuseum ever acquired.
It is called "The Threatened Swan". You should find a small reproduction of this painting on
your menu.
If you look at it, you see a swan with its wings spread wide, defending its eggs against a
dog that is sneaking up through the water.
This painting is seen as an allegory for what happened to us in 1672. The year that in Dutch
history books is marked as "The Disaster Year".
"The Disaster Year" because in that year, the Dutch "Republic of the 7 Provinces" was under
fierce attack. Simultaneously from the English in the west, the French in the south, and
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German armies in the north.
The allegory that is represented by "The Threatened Swan" also goes beyond 1672.
Essentially, it is a painting about hard times, about being under threat, and about how you
respond.
Also today, 350 years later, we find ourselves facing hard times, experiencing several
threats, and asking ourselves how to respond to them.
One of these threats is an inflation rate that we have not seen in decades. Inflation that is
now expected to stay well above our target for an extended period of time. Inflation that is
jeopardising the livelihood of many millions throughout Europe.
So, looking at my fellow central bankers here tonight, I must ask: what will we do?
Shall we sit quietly? I don't think so. No, the job for the central bankers among us is clear.
Like on the painting, we will rise up, fiercely spread our wings, and protect our eggs from
the menacing mongrel of inflation.
Hence the ECB's recent move - to raise interest rates by 75 basis points.
As my central bank colleagues gathered here tonight will confirm, this major transition in
monetary policy was a necessity. At current inflation levels - levels that are threatening
our European prosperity - we need to rapidly transition away from a highly
accommodative monetary policy to interest rate levels that will support a timely return to
our inflation target of two percent over the medium term.
And I anticipate further rate hikes over the coming months, to be specified meeting by
meeting, based on data, and guided by our objective of price stability.
But we know that, even with our recent, major changes to monetary policy, it will take
time for these changes to take effect in the economy and actually bring inflation down.
That is why I am grateful to be here.
However much I like preaching to the monetary choir in this room, being here gives me the
opportunity to address the full EFC, including member states' finance ministries, the
European Commission and related agencies. Hence, an opportunity to re-emphasise the
value of working together.
In the aftermath of the global financial crisis, after 2008, monetary and fiscal policy were
each fighting their own battles. Partly due to this, and with the benefit of hindsight,
economic recovery was slowed down.
More recently, a mere two and a half years ago, the dog in the water was the corona virus.
In the meantime, however, we had learned valuable lessons from the past. So when the
pandemic hit us it was a swift and balanced cooperation between monetary and fiscal
pandemic hit us, it was a swift and balanced cooperation between monetary and fiscal
policy that gave our economy wings to fight back.
And that is what we need to do now as well: to jointly work towards our common goal - a
secure and prosperous Europe. Needless to say, each within our own mandate.
But I would also like to express a word of caution though: fiscal measures that are aimed
at compensating households for high inflation might themselves become inflationary when
they further increase the imbalance between supply and demand. And higher inflation
would in turn require, again, a firmer policy response from central banks.
But from a democratic, and perhaps more importantly, moral stance, the valid question
remains: what can governments do to alleviate some of the worst economic pain without
increasing price pressures further?
First of all, we probably all agree that the most vulnerable households need to be helped
with well-targeted financial support. For a lot of other households, compensation should
come from targeted wage growth. While it is paramount to avoid a wage-price spiral, it is
also important that wages rise in sectors of the economy that have the scope to do so.
Second, governments should address supply-side restrictions more directly where they can.
On the energy market, this means achieving a more balanced mix of energy sources as
soon as possible. On the labour market, this means removing the impediments that
constrain labour supply growth - there is still room for improvement in labour
participation in several European countries.
Third, the economic reform agenda and the public investments that can boost potential
growth must continue. And preferably, this will be done without further deficit spending,
because public debt levels are already uncomfortably high.
If you look again at "The Threatened Swan", you will see a very natural phenomenon: a
swan defending her eggs.
But the swan is also fierce and grand. Filled with passion. Filled with conviction. If it could,
the swan would march right into this gallery.
For many of us here tonight, the dog in the water is inflation. For others, it is the energy
crisis. The refugee crisis. The climate crisis. The pandemic. An atrocious war on European
soil.
Each and every one of us, here or elsewhere, each in their own capacity, should step
forward, spread their wings wide, and defend, fierce and grand, with passion, with
conviction, the eggs of our times.
I thank you and wish you a very pleasant evening.