ECB’s Rehn: If Inflation Risks Getting Too High, Monetary Policy Will Take Action
22 December 2021
By David Barwick – FRANKFURT (Econostream) – Should inflation threaten to mount too much, the European Central Bank will take action to counter this, ECB Governing Council member Olli Rehn said on Wednesday.
In the editorial of the latest bulletin of the Bank of Finland, which he heads, Rehn said that in contrast to the early phase of the crisis, ‘[a] different situation applies when the worst phase of the pandemic’s economic effects is over. Central banks’ monetary policies can begin to be gradually normalised as the economy recovers and the inflation outlook changes.’
Rehn warned that ‘[t]he pandemic is not yet over, and the road ahead could be very bumpy. Moreover, the effects of the COVID-19 crisis are still being felt strongly across the economy, and this includes rising inflation.’
High inflation rates appeared ‘set to continue longer than previously forecast, although many of the factors driving inflation are by their nature transitory’, he wrote.
‘The price of energy could stay high for a prolonged period, and the production bottlenecks will not disappear overnight’, Rehn elaborated. ‘However, by themselves they will not lead to a prolonged rise in inflation, unless they cause significant second-round effects and a wage-price spiral. Wage inflation in the euro area has so far been moderate. However, in the current exceptional circumstances, inflation forecasts are attended by a large measure of uncertainty.’
‘If inflation threatens to climb too high, the ECB’s monetary policy will work to prevent this by reducing the purchase programmes and refinancing operations as well as by raising policy interest rates’, he said. ‘This is how an independent central bank that has been set the primary objective of price stability operates.’