ECB’s Rehn: Economic Outlook Improving But Uncertainties Remain

1 July 2021

By David Barwick – FRANKFURT (Econostream) – Euro area economic prospects are brightening but are still uncertain, European Central Bank Governing Council member Olli Rehn said on Thursday.

In a speech before a conference on systemic risk analytics, Rehn, who heads the Bank of Finland, said that with respect to current monetary policy, ‘we are still affected by the COVID-19 crisis.’

‘The outlook for the economy has recently been improving’, he said. ‘The latest data do signal a rebound in services activity and ongoing dynamism in manufacturing output. We expect economic activity to accelerate in the second half of the year as further containment measures are lifted.’

Uncertainties remain, with the near term vulnerable to the evolution of the pandemic and the economy’s reaction to the lifting of containment measures, he said. The present surge of inflation should be ‘largely transitory’ and medium-term HICP would undershoot the ECB’s objective, he said.

Rehn reiterated the ECB’s forward guidance on interest rates and the intention to conduct net asset purchases at least through next March. ‘In our view, premature tightening of financing conditions must be prevented, as this would pose a risk to the ongoing economic recovery and the outlook for inflation', he said.

Turning to the ECB’s ‘evidently outdated’ monetary policy strategy, Rehn said the main problems were ‘the double-key formulation of the price stability objective and a monetary policy framework that cannot deliver inflation expectations anchored to the inflation aim.’

He called for ‘a clear and single definition of price stability and the inflation target’ that would be ‘understood by the public as symmetric at – and not below – 2%’ as well as for ‘a reaction function that will anchor inflation expectations to the target and will deliver sufficiently forceful and equally effective policy actions to deviations from the target in either direction.’

Such a reaction function would give due consideration into the elevated risk of bumping up against the effective lower bound, he said.

‘As far as the central banks are concerned, the biggest contribution they can make to the society is to deliver on their price stability mandate, which will also contribute to sustainable economic growth and broad-based, inclusive employment growth’, he said. ‘I am confident that the outcome of the ECB’s monetary policy strategy review will enhance the effectiveness of our monetary policy and the attainment of price stability, and thus also enabling sustainable growth and full employment.’