ECB’s Rehn: Makes Sense to Accept a Certain Period of Overshooting
10 May 2021
By David Barwick – FRANKFURT (Econostream) – The European Central Bank should be willing to allow inflation to overshoot its target for a certain period of time, Governing Council member Olli Rehn said on Sunday.
In an interview with the Financial Times, Rehn, who heads the Bank of Finland, said that given that ‘the economy can cope with lower levels of unemployment . . . without rapid inflation’, then ‘[i]f this is the case, from the point of view of economic and social welfare it makes sense to accept a certain period of [inflation] overshooting, while taking into account the history of undershooting.’
‘That is why, in addition to price stability, a focus on full or maximum employment makes sense in the current context of a lower natural rate of interest’, he added.
The ECB’s current price stability objective has ‘generated a perception of asymmetry and some ambiguity’, he said. ‘What is worse is that 2% has been perceived as a ceiling and that is dampening inflation expectations.’
According to Rehn, the role of monetary policy during the exit from the crisis is to ‘ensure favourable financing conditions so that we will continue to provide a bridge over troubled water.’
The reduction of sovereign indebtedness is ‘very important’, he said. ‘Europe still needs very accommodative monetary policy. This stance will, however, not be maintained forever and at some point the financing costs of the sovereigns will increase.’