ECB’s Rehn: Must Avoid Premature Exit from Loose Monetary Policy

3 July 2020

By David Barwick – FRANKFURT (EconoStream) – The European Central Bank should play it safe when it comes time to withdraw monetary accommodation so as to avoid any need to backtrack, ECB Governing Council member Olli Rehn said on Friday.

During a panel as part of “Les Rencontres Économiques 2020”, Rehn, according to a text provided by the Bank of Finland, which he heads, said that current monetary support would eventually lead to an environment in which sovereigns face higher borrowing costs.

‘Going forward, we can expect that, with the sizable monetary and fiscal support, the European economy will return to the path of growth over the coming years’, he said. ‘This will reduce slack and create inflationary pressures again, and one day the member states and their governments should be prepared to live with less accommodation and higher rates.’

Although the ECB is committed to its price stability mandate and unlikely to accept fiscal dominance, this ‘is not to suggest that we should opt for an early withdrawal of monetary support’, he emphasized, reminding of the two rate hikes the ECB implemented and then promptly undid in 2011.

‘As monetary policy is as much art as science, it is better to be safe than sorry when considering the right timing to withdraw monetary policy support, and verify for a certain period of time that inflation indeed has solidly reached the medium-term price stability target’, he said.

The ECB’s measures in the current situation reflect the lesson of past crises that the monetary policy response is best ‘overwhelming’, he said. A fiscal response to match ‘should be on its way’, he added.

The ECB’s reaction is justified by its mandate, given that the pandemic’s overall impact on inflation is negative in the short and medium terms and has indeed renewed the threat of deflation, he explained, reiterating comments made earlier in the week.

National economies should use this room to maneuver to implement needed reforms, he urged.

Rehn appealed for more effort from the fiscal side, calling the ‘midsummer’ European Council meeting, presumably a reference to the meeting of 16 June, ‘a disappointment.’

‘Recent diplomatic actions, however, give a reason to expect that leaders of the European Union can agree on a European recovery fund soon’, he continued. ‘Combined with the individual member states’ fiscal stimulus, this would reinforce the recovery and better share the burden with monetary policy.’