ECB’s Rehn: Seems Necessary to Move Relatively Quickly out of Negative Territory

18 May 2022

By David Barwick – FRANKFURT (Econostream) – The European Central Bank should fairly rapidly get its interest rates out of negative territory, Governing Council member Olli Rehn said on Wednesday.

In a speech at a seminar of the Bank of Finland, which he heads, Rehn said that the ECB faced a ‘challenge in preventing inflation expectations from becoming unanchored’, which was ‘why the first interest rate hike in over a decade is likely to take place in the summer.’

A string of upside inflation surprises in both realised outcomes and forecasts, core indicators that are ‘rising steeply’ and expectations that are ‘shifting upwards’ boost uncertainty and put pressure on wages, while the impact of the war is intensifying, he said.

‘As far as market expectations are concerned, market participants appear to expect us to raise interest rates two or three times this year, starting from July’, he said. ‘They expect a shift out of the ‘low-for-long’ interest policy and the negative and zero interest rate environment by the end of the year.’

‘Based on the current analysis of the economic and inflationary outlook, and especially in light of the need to contain the creeping unanchoring of inflation expectations, it is my view that it seems necessary that in our policy rates we move relatively quickly out of negative territory and continue our gradual process of monetary policy normalisation’, he continued. ‘I am not alone, as this is also the indication given by many of my colleagues in the ECB Board and Governing Council.’

Rehn called into question whether euro area wage developments would remain moderate, citing ‘clear signs of acceleration in the first months of this year.’ Keeping inflation expectations anchored ‘is now the single most critical factor in determining the course of monetary policy’, he said.

The ECB’s June macroeconomic projections would probably show growth more like that envisioned in the adverse and severe scenarios published in March alongside the baseline, he said.