ECB’s Rehn: Better Under Uncertainty to Normalise Monetary Policy Gradually and Step-by-Step

10 February 2022

By David Barwick – FRANKFURT (Econostream) – Given the current state of uncertainty, it is advisable that monetary policy be normalised in gradual steps, European Central Bank Governing Council member Olli Rehn said Thursday.

In a speech at a stakeholder network event of the Bank of Finland, which he heads, Rehn said that the medium-term inflation outlook was ‘not far’ from the ECB’s medium-term target of a symmetric 2%.

‘Monetary policy decisions will not respond to short-term deviations of inflation from the 2% symmetric target unless they are expected to have a more lasting impact on inflation’, he said. ‘However, if inflation threatens to accelerate excessively and in the long run, the ECB's monetary policy will work to prevent it by reducing purchasing and financing operations and raising key interest rates.’

At its meeting last week, the Governing Council was of the view that ‘there are risks of a faster-than-expected acceleration in inflation’, he said. ‘In a situation of uncertainty - I am also referring to the prevailing geopolitical tension and its potential effects on energy and growth - it is better to say, as the street says, that is, to proceed with the normalization of monetary policy, in particular gradually and step by step.’

Currently high inflation was due more than half to energy prices, he said. ‘The escalation of the geopolitical situation is likely to keep energy prices high for a long time’, he said.

In any event, the factors behind inflation will not by themselves ‘lead to a permanent, long-term acceleration, unless they cause large multiplier effects, i.e. a price-and-wage-spiral’, he said. ‘Unlike in the United States, wage inflation has so far been relatively modest in the euro area. The development of wages is now being monitored particularly closely.’