ECB’s Rehn: No Room for Complacency in Monetary Policymaking

16 September 2022

By David Barwick – FRANKFURT (Econostream) – Monetary policy cannot be complacent in the current environment, which is why the European Central Bank is frontloading its return to interest rates consistent with price stability, Governing Council member Olli Rehn said on Friday.

In remarks at a conference of the Bank of Finland, which he heads, Rehn said that inflation risks were mainly upwards. Although monetary policy traditionally ignores supply-side inflation shocks, current price pressures are proving unexpectedly persistent and are broadening, he argued.

Still, with inflation anticipated to ‘gradually subside’ once energy prices peak, the ‘bigger question’ is whether inflation is now also demand-based, he said.

Wages have not yet exhibited ‘strong signals’ of becoming an issue, he said in this regard, though with the picture not clear, he urged that a better understanding of how wages are set be a focus of research.

Continuing on the subject of how inflation could become self-sustaining, Rehn said that to the extent expectations are formed in a backward-looking manner, achieving price stability can become more difficult.

‘This obviously means that there is no room for complacency in monetary policymaking’, which explains the frontloading of last week’s Governing Council decision, he said.

‘On the other hand, fears over adverse wage-price dynamics and fiscal dominance should not be exaggerated at the current juncture’, he continued. ‘Anyway, together with the many other uncertainties and unknowns, these factors call for a consistent and steady tightening cycle.’

The ECB is now in ‘a period of making decisions meeting by meeting, on the basis of incoming data, guided by our current monetary policy strategy’, he said.

Following last week’s 75bp rate hike, ‘we can assume further rises going forward’, he said.

During the ensuing Q&A, Rehn called ‘really crucial’ the question of ‘whether and how the European Union can resolve the energy crisis or at least mitigate the effects’, and in this context urged the delinking of electricity prices from gas prices.