By David Milliken

WASHINGTON (Reuters) – The European Central Bank (ECB) should maintain flexibility in future interest rate decisions, stated Dutch central bank chief Klaas Knot on Saturday. This comment responds to market speculation suggesting a guaranteed interest rate cut in December.

Last week, the ECB made its third interest rate cut this year. Four sources informed Reuters that a fourth cut could occur in December unless there are significant improvements in economic data over the next few weeks.

However, three ECB officials attempted to mitigate expectations around further rate cuts, and Knot echoed this sentiment during a Group of Thirty meeting in Washington, held alongside the International Monetary Fund and World Bank annual meetings.

Knot emphasized the importance of keeping all options available, suggesting that maintaining full optionality serves as protection against various risks to growth and inflation. He stated, "We believe that our meeting-by-meeting and data-dependent approach has served us well."

On the current market expectations for rate cuts, Knot acknowledged they have surged dramatically due to weak economic indicators like the purchasing managers' index and consumption data. He remarked, "We will have to see whether that was a little bit over-enthusiastic or not." Current calculations will be revisited in December.

Knot compared the economic situation in the euro zone to the weather in Amsterdam: "It’s not as bad as some people would have you believe, but it’s definitely not great." Although incoming data since September has boosted the ECB's confidence in achieving the 2% inflation target, he warned of possible downside risks to growth but did not foresee a recession.

He indicated that for inflation to sustainably return to target, there must be a decrease in services price inflation and a notable reduction in wage growth.

Knot noted, "On the one hand, policy restriction may be reduced more quickly if incoming data indicates sustained acceleration in the speed of disinflation or a material shortfall in the economic recovery. On the other hand, policy restriction may be taken away more slowly, should upside risks to inflation materialize or incoming data share the opposite picture regarding growth and inflation."