ECB’s Knot: Europe’s defence spending justified but adds inflation uncertainty

Dutch central bank chief and European Central Bank (ECB) Governing Council member Klaas Knot stated on Thursday that Europe’s rising defence spending is justified but could complicate inflation forecasts and monetary policy.

Amid escalating geopolitical tensions and the risk of a trade war with the US, Knot acknowledged the need for a temporary exemption from EU budget rules on military expenditure. However, he stressed that such exemptions should remain short-term due to already high public debt levels.

Germany has adjusted its fiscal constraints to increase defence funding, while the EU is considering easing its own budget rules to accommodate higher spending. While this boost in expenditure may support economic growth, it has also contributed to rising borrowing costs, leading to mixed inflationary effects.

ECB President Christine Lagarde previously cautioned that a full-scale trade war could slash eurozone growth by 0.5 percentage points while driving inflation up by the same margin.

With inflation uncertainty at its highest in years, Knot emphasized that predicting interest rate moves has become increasingly difficult. Investors currently estimate a 60 per cent chance of an ECB rate cut in April, with a second reduction likely before the end of the year.

Attribution: Reuters

Subediting: Y.Yasser