According to the governor of the Bank of the Netherlands, Klaas Knot, the widespread view that the European Central Bank (ECB) cannot raise its key interest rate because of the high level of debt in some member states is incorrect.

Too much importance is attached to this view, said Knot at the World Economic Forum in Davos.

Gerald Braunberger

Editor.

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A country's ability to repay the debt is important for assessing the sustainability of government debt.

In the current situation, inflation alone will lead to significant growth in nominal economic output and thus in government revenue, explained Knot.

Equally important is the fact that many countries have used the very low interest rates in recent years to increase the average duration of their government debt.

"In such a situation, if the central bank temporarily raises interest rates to fight inflation, it will not have a significant impact on the sustainability of government debt," Knot said.

Therefore, from the point of view of highly indebted countries, a timely and consistent fight against inflation is the best monetary policy.

Knot objected to the notion that the inflation rate in the eurozone is overwhelmingly due to energy and food price increases, which central banks are powerless to combat.

The fact that both the inflation rate and economic growth are currently higher than expected also speaks in favor of strong aggregate demand as a reason for inflation.

In this case, monetary policy is required.