Higher inflation will continue for the time being, DNB warns

This article was last updated on December 13, 2024

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Higher inflation will continue for the time being, DNB warns

It will not be possible to get the high price increases under control in the coming year. While it was previously expected that inflation will drop to 2.8 percent next year, De Nederlandsche Bank (DNB) now predicts that price increases of 3.2 percent will remain as high as this year.

Without measures, the current high price increases could even become structural in the Netherlands, DNB warns in a new autumn estimate of the economy. This new view of inflation is a complete change from the optimistic tone of last summer. At that time, DNB was still counting on a quick end to the extreme price increases in shops and supermarkets. “A normal inflation of 2 percent is within reach“, DNB board member Olaf Sleijpen said in June.

Higher than other eurozone countries

Six months later, this price stability has already slipped from the Netherlands’ fingers, according to the new estimate. Inflation has been low in the Netherlands in recent months structurally higher than many other countries in the eurozone. Initially, higher rents and taxes on tobacco were blamed for this. But energy and fuel prices are now also rising, with no end in sight to food products that are becoming more expensive.

DNB President Klaas Knot has called on unions several times this year to stop getting the most out of it with wage increases. Unions believe that companies make high profits.

Yet Sleijpen does not think that a new social agreement is needed to prevent wages and therefore prices from continuing to rise. “It has not yet reached the point where inflation is really going through the roof,” he says. “I appeal to everyone’s reasonableness. I think everything will turn out fine.”

Interest rate reduction

The problem is that the Netherlands will have a lot less help from the European Central Bank (ECB) next year. To stop the high price increases, the ECB previously raised interest rates to a record 4 percent. This made borrowing money more expensive, which should cool the economy. And because this is now happening in the eurozone, the ECB is setting the interest rate again this year decreasing.

DNB predicts that the economy will start to turn again in 2025 and 2026 with 1.5 percent growth. To dampen price increases, strangely enough, this is actually less good news. DNB no longer has an interest rate knob to turn since the introduction of the euro itself. “We can only say with our mouths that sensible policies must take inflation into account,” Sleijpen explains.

He also points to the government’s policy: “Be aware of inflation. It might be good to include an inflation paragraph in bills, stating the impact of a measure on inflation.”

Agreements on new rent increases, for example, are such an option, according to Sleijpen. “This develops along with wage growth. If you can reach an agreement together and agree on a lower rent increase, then that will contribute to inflation.”