Euro up 0.70%, ECB's Knot Talks of Large Rate Hike in July

Above: ECB Board Member and Head of the Dutch central bank, Klaas Knot. Image © ECB.

The European Central Bank (ECB) looks increasingly likely to raise interest rates in July with one member of the Governing Council warning a surprisingly large hike could be delivered.

Dutch central bank governor Klaas Knot said in an interview Tuesday the ECB should raise its key interest rate by 25 basis points in July, but should not yet rule out a bigger increase.

Knot's comments were quoted by Dutch TV programme College Tour.

The comments shore up the prospect for a July rate hike but opening the door to anything greater than a 25 basis point hike represents a hawkish surprise from a currency perspective.

This sentiment is expressed through a stronger Euro against the Dollar: EUR/USD has risen 0.70% by the time of writing to quote at 1.0511. (Set FX rate alert here).

"The first interest rate hike is now being priced in for the monetary policy meeting of 21 July, and that seems realistic to me," Knot said.

He said the ECB should keep the door open to a bigger move if incoming data over the next few months would suggest that inflation is "broadening further or accumulating". "A bigger increase must not be excluded either... a logical next step would amount (to) half a percentage point," he said.

Knott's comments come a day after ECB Governing Council member François Villeroy de Galhau expressed concern that the Euro was too weak and was therefore contributing to inflation.

"Let me stress this: we will carefully monitor developments in the effective exchange rate, as a significant driver of imported inflation," Villeroy told a conference at the Bank of France.

The commentaries form the latest in a series of signals the ECB is preparing the market for rate hikes in response to surging inflation, a development which could underpin the Euro's outlook against the Dollar, particularly if expectations for Federal Reserve rate hikes are at a saturation point.