ECB’s Rehn: Whenever Inflation Eventually Recovers, We Will React

1 July 2020

By David Barwick – FRANKFURT (EconoStream) – Whenever it is that inflation increases, no one should think that the European Central Bank won’t modify its stance accordingly, ECB Governing Council member Olli Rehn said on Wednesday.

In an interview with German business daily Handelsblatt, Rehn reminded national governments of their responsibility to prepare for tighter monetary policy by implementing needed reforms.

The pandemic’s overall impact on inflation is negative in the short and medium terms and has indeed renewed the threat of deflation, he said. Still, ‘[i]f inflation should pick up again at some point, the ECB will react, and nobody should fool itself’, he said. ‘Price stability is our mandate.’

The fact that some countries would face a problem if interest rates increased ‘is why my core message is: Governments must use the time of low interest rates for reforms that boost growth and generate jobs’, he said. ‘That will also enable reducing the high levels of public debt.’

Asked whether the ECB might adopt a policy of yield curve control, under which it would commit to buying debt so as to maintain the long-term yields of euro area governments within a targeted range, Rehn noted that some central banks were already taking a similar approach. However, he suggested that the flexibility of the ECB’s pandemic emergency purchase programme (PEPP) would ensure proper policy transmission.

‘The government bond spreads have narrowed down’, he said. ‘But I don't think there is a scientific method to determine the appropriate level of the spreads.’

Although a so-called bad bank that would serve as repository for high-risk assets was successful during the Finnish banking crisis of almost 30 years ago as well as in Spain during the more recent financial crisis, ‘it may not make sense to install that at European level’, he said. ‘You need a very good knowledge of the national and regional real estate markets in particular.’

The €1.3 trillion take-up last month of the ECB’s targeted longer-term refinancing operations [TLTRO] III ‘is a positive sign hopefully reflecting an easing of lending conditions in the euro area’, Rehn said. Authorities need to take care that the money doesn’t go ‘to finance too many zombie companies’, he said.