ECB’s Rehn: ECB Firmly Committed to Contain Unwarranted Fragmentation

18 June 2022

By David Barwick – FRANKFURT (Econostream) – The European Central Bank is firmly committed to keeping unwarranted fragmentation from interfering with the transmission of its monetary policy, Governing Council member Olli Rehn said on Saturday.

In remarks at a conference of the Dallas Federal Reserve, Rehn, who heads the Bank of Finland, said that ‘flexibility will firmly remain in our policy toolbox’ and cited the statement of the ECB following last week’s ad hoc meeting in noting that ‘we decided to accelerate the completion of the design of a new anti-fragmentation instrument for consideration by the Governing Council.’

This showed that the ECB was ‘firmly committed to contain unwarranted fragmentation that would impair monetary policy transmission’, he said.

Where fragmentation reflected structural issues such as debt sustainability, a programme of the European Stability Mechanism and then the ECB’s Outright Monetary Transactions remained an option, he said.

‘Going forward, we will lean on the revised strategy in order to proceed simultaneously, i.e. in parallel with, both the gradual, orderly normalisation of monetary policy, on one hand, and the necessary measures for containing unwarranted financial fragmentation, on the other’, he said.

‘And trust me that we have both the instruments and – at least equally important – the firm will to make sure that Eurozone inflation stabilizes at its 2% target over the medium term’, he added.

As more expensive energy and supply constraints could not by themselves cause persistently higher inflation, the key question is whether expectations and thus wage demands will rise and lead to a wage-price spiral, he said.

‘So far, while wage growth has started to pick up in the Eurozone, the situation is still different from that in the United States’, he said. ‘Our labour market is holding up well and unemployment is at a 40-year low, at 6.8%, but there is still slack and the market is not running red hot.’

Wage growth this year of approximately 3% ‘does not yet equal to or imply an outright second-round wage-price spiral’, he said, but expectations have to be kept under control.

‘Indicators of underlying core inflation have been rising rapidly this year, and inflation expectations have been shifting upwards’, he said. ‘That is why the ECB’s first interest rate hike in over a decade will take place soon.’

‘Based on the current outlook, we are likely to be able to exit negative territory in interest rates by the end of the third quarter’, he said.