ECB’s Rehn: Ready to Unwind in Due Course, But Not Yet; Focus Still on Crisis

15 March 2021

By David Barwick – FRANKFURT (Econostream) – The European Central Bank is prepared to unwind its accommodative stance when the time comes, but an interest rate hike is not even looming on the horizon at this point and the current focus remains strictly on the crisis, ECB Governing Council member Olli Rehn said on Monday.

In an opinion piece in Finnish business daily Kauppalehti, Rehn, who heads the Bank of Finland, said, ‘Economic recovery has begun, and towards the summer the health threat should also recede with the introduction of vaccinations.’ Still, ‘the near-term economic situation remains difficult’, he said.

‘In recent weeks, financial conditions in the euro area have tightened somewhat’, he said, which is why the ECB decided ‘a significant increase’ in asset purchases compared to the year to date.

‘The Governing Council is committed to fulfilling its role of price stability, even in the event of an excessive acceleration in inflation, and is therefore ready to unwind the stimulus in due course’, he wrote. ‘It has effective tools for that. However, a rise in interest rates is not yet around the corner, nor is it looming on the horizon either. On the contrary, the focus is strictly on mitigating the effects of the acute corona crisis.’

Rehn discussed the ECB’s strategic review, noting that it was taking place against the backdrop of a long-term real equilibrium interest rate that had ‘fallen so low that it has limited the ability of central banks to respond to cyclical developments by easing monetary policy through traditional instruments.’

‘Indeed, since the financial crisis, the risk of deflation has become a greater concern than that of runaway inflation’, he continued. However, the introduction of nonstandard policy measures has diminished the significance of the zero lower bound and averted deflation, he asserted.

The issue of guiding inflation expectations was ‘at the heart of the strategic review’, he said. In view of the changed environment and the zero lower bound, ‘it is important that the inflation target is understood as symmetrical’, he said. ‘If it is seen to lead more often to inflation rates below rather than above 2%, inflation expectations will be set too low. This would make it more difficult to achieve 2% inflation.’

As a result, ‘the most plausible option for a new target … is a symmetrical 2% point target and the inclusion of the zero lower bound in the monetary policy stance’, he said. ‘This would help to set inflation expectations at the right level and thus help to achieve the targeted - low but not too low - inflation.’

Rehn added that ‘emphasis should be placed on strengthening employment in a context of structurally subdued inflationary pressures.’