FRANKFURT (Reuters) – At least two more quarter-point rate hikes are needed in the euro zone, Klaas Knot, a member of the European Central Bank’s governing council, said on Thursday, adding that market expectations for cuts early next year are too ambitious.

“The two increases planned for June and July are fully priced in and our inflation outlook is already conditioned by these increases,” Klaas Knot said in an interview with several European media, including Les Echos. “I am confident that our analysis will show the need to continue raising rates by at least two times 25 basis points.”

“But I’m totally open to what happens after the summer,” he continued.

Markets are expecting a further 65 basis point rally, suggesting that increases in June and July have been fully priced in and investors are split on what decision will be made in September.

Regarding possible rate cuts anticipated by the markets for early 2024, Klaas Knot argued that once the cycle of hikes is over, the ECB will have to keep rates high until inflationary pressures are neutralized.

“I think when we hit the peak in rates, we’ll have to stay there for quite a long time,” the Bank of the Netherlands president said. “The market forecast for declines is too optimistic.”

“Underlying inflation is currently our main concern and it is not yet showing signs of slowing down, particularly in services… The peak in headline inflation is clearly behind us, but as far as core inflation, we’re not sure we’ve peaked yet,” Klaas Knot added.

(Alvise Armellini, written by Balazs Koranyi, Laetitia Volga, edited by Nicolas Delame)

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