ECB’s Rehn: Inflation Trend in Line with Strategy; No Overreacting

19 October, 2021

By David Barwick – FRANKFURT (Econostream) – Inflation developments now being seen are temporary, and with the trend consistent with the European Central Bank’s monetary policy, the ECB is inclined not to react prematurely, ECB Governing Council member Olli Rehn said Tuesday.

In a speech, Rehn, who heads the Bank of Finland, said his view was that currently elevated inflation was ‘still mostly transitory, even if some of its components are partly more persistent than previously expected.’ Europe’s economy still had ‘plenty of slack’, being ‘in another phase of recovery and behind the cycle compared to the United States’, he said.

However, he said, ‘[i]f this state of elevated inflation were to last much longer, it would likely have a more significant effect on inflation expectations.’ There is already evidence of this occurring, he indicated, as selling price expectations three months forward in industry and retail ‘have started to rise amid these temporary price pressures’, while short-term market-based expectations have risen.

On the other hand, he continued, longer-term expectations showed ‘no upward trend’ and there has been ‘no major evidence’ to date of second-round effects on wages. ‘Wage growth is still below pre-Covid average, despite significant sectoral labour shortages’, he added.

Medium-term core inflation of 1.5% and long-term inflation expectations of 1.9% suggest that ‘the trend in euro area inflation is now in line with the ECB’s strategy’, he said. ‘Logically, on the basis of this data and in line with its revised strategy, the ECB leans on the side of not overreacting.’

Should realised inflation be above or below target, the central bank will respond ‘gradually, considering the nature of the economic disruption’, he said. ‘Deviations estimated to be temporary may not be responded to at all, but seen through.’