Markets getting ahead of themselves on rate cuts and risk being 'self-defeating,' ECB member says

Markets are "getting ahead of themselves" with rate cut expectations, the president of the Dutch central bank, Klaas Knot, told CNBC Wednesday.

"The problem for us is that in the end that might become self-defeating. We are optimistic that we have a credible prospect of a return of inflation to 2% in 2025. But a lot still needs to go well for that to happen," European Central Bank member Knot said, speaking at the World Economic Forum in Davos.

"Underlying that projection is an interest rate path, assumed interest rate path, that contains significantly less easing than is currently embedded in market pricing. So that runs the risk to become self-defeating."

Knot said the euro zone's central bank looked at overall financial conditions, and that "the more easing the market has already done for us, the less likely we will cut rates."

"I think there are expectations of our policy rate movements in current markets that we will not vindicate. Once it becomes clear to markets that we will not vindicate, I do expect some correction back to the interest rate path that was underlying our optimism of a gradual return to 2% inflation in 2025," he added.

ECB officials at this year's Davos have largely pushed back on market expectations for interest rate cuts starting as soon as the spring.

Austrian central bank head Robert Holzmann, an ECB arch-hawk, told CNBC on Monday that there were threats to the inflationary picture that could mean rates do not move lower at all this year.

But his more dovish colleague, Portugal's central bank governor Mario Centeno, painted an optimistic picture of the inflation trajectory.

The ECB will stick to its plan for reducing inflation, as it battles risks from the tight labor market and geopolitical