ECB’s Rehn: The Case for Frontloading and Determined Action Is Stronger than for Gradualism

28 September 2022

By David Barwick – FRANKFURT (Econostream) – It is currently more appropriate for monetary policy to apply the principles of frontloading and determination rather than that of gradualism, European Central Bank Governing Council member Olli Rehn said on Wednesday.

In an interview with Reuters, Rehn, who heads the Bank of Finland, said that the broadening nature of inflation was grounds for concern, and expressed the fear that persistent excessively high inflation could disanchor expectations.

‘Today there's a stronger case for frontloading rate hikes compared to gradualism, mainly to ensure that inflation expectations do not become entrenched’, he said. ‘Until early this year, I was in favour of gradualism but for now, there is a stronger case for frontloading and determined action.’

As for whether the interest rate move to be taken by the ECB next month would exhibit frontloading, Rehn reminded that decisions were now being made on the basis of a meeting-by-meeting approach.

‘But in my view, it's worth being consistent’, he added. ‘In the current inflation environment, frontloading is justified. There is a case for taking a decision on another significant rate hike, be it 75 or 50 basis points or something else.’

The ECB was ‘heading towards the range of the neutral rate by Christmas’, he said. ‘Once we get there, we’ll see if there’s a case to move into restrictive territory. Let's cross that bridge once we get there. I'm agnostic in that regard. If we deem that the inflation outlook calls for a move towards restrictive territory, so be it.’

The ongoing climb of core inflation was ‘really the crux of the matter’, he said. Still, ‘relatively moderate’ wage developments were acting as an ‘anchor’ for now, he said, and while a rise in short-term expectations justified some concern, ‘longer term expectations are still by and large anchored.’

The Governing Council has not yet discussed quantitative tightening, he said, but it was coming. He declined to say whether the last rate hike needed to precede such a discussion.