ECB's Knot: stock market rally could be fuelled by recovery hopes

AMSTERDAM (Reuters) – The continuing rise of stock markets worldwide could be the result of growing hopes of economic recovery, and does not necessarily mean that prices are overly inflated, European Central Bank governing council member Klaas Knot said on Sunday.

“We definitely see high valuations,” the Dutch central bank governor said in an interview on Dutch public television.

“Stock markets could be preempting the roll out of vaccines and the reopening of economies. We might be entering the roaring twenties, we don’t know.

“Also interest rates are low, which is important for stock valuations and leads to higher stock prices,” Knot said.

But Knot warned individual investors against joining the recent rallies in companies such as GameStop.

“If this becomes a race between individuals and professional investors, it is clear who will suffer in the end: the small investor,” he said.

Knot said he was “cautiously optimistic” on the chances for economic recovery later in the year, as COVID-19 vaccinations could enable countries to end lockdowns.

“2021 will likely have two faces”, he said. “Vaccinations offer the perspective of a way out of this crisis and a much better second half of the year.”

Knot said earlier this week that the ECB still had room to cut interest rates if the economic recovery proves too slow to keep its inflation target in sight.

Another ECB policymaker, Isabel Schnabel, said on Sunday that one-off factors were likely to cause spikes in inflation later this year and that raising interest rates in the current environment would have a “devastating impact”.

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