ECB’s Rehn: Barring new Pandemic or Geopolitics Shocks, Logical for Rates to Rise 2023 at Latest

4 February 2022

By David Barwick – FRANKFURT (Econostream) – As long as the pandemic and the geopolitical situation do not engender any negative shocks, the European Central Bank could be expected to start hiking interest rates in 2023 at the latest, ECB Governing Council member Olli Rehn said on Friday.

In an interview with Finnish daily Helsingin Sanomat, Rehn, who heads the Bank of Finland, said, ‘The economic recovery in the Eurozone continues and inflation has accelerated. If there is no backlash in the pandemic or geopolitical situation, it would be logical for the ECB to raise interest rates next year at the latest. We will ensure that the rise in prices remains moderate in the medium term.’

The ‘gradual normalization’ of monetary policy was decided in December, he said.

‘On the positive side, the economic recovery in the euro area is continuing and employment is improving despite the Omicron variant’, he said. ‘The bad news is that inflation will remain high for longer than expected, with rising energy prices and geopolitical tensions being the main drivers.'

A sustained increase in energy prices would probably spark generalised price pressures, he said. He observed that monetary policy was largely powerless to affect energy prices.

‘So far, wage inflation in the euro area has been modest’, he said. ‘At the March meeting, we will have a better understanding of inflationary pressures and, in particular, wage developments.’

The Council would make decisions on the basis of the latest data, he said. Rehn said that he had proposed to gather information on Eurozone wages more rapidly.

‘In March, we may also see more closely how Russia’s power policy has affected energy prices’, he said. ‘However, I do not think that the tensions in Ukraine and Europe will ease quickly, but rather we should prepare for Russia's long war of nerves.’