ECB’s Rehn: Monetary Policy Has to Keep Expectations Anchored

22 November 2022

By David Barwick – FRANKFURT (Econostream) – The European Central Bank is likely to hike interest rates further and must keep expectations anchored, ECB Governing Council member Olli Rehn said on Tuesday.

In remarks at a public hearing of the Finance Committee of Finnish Parliament, Rehn, who heads the Bank of Finland, said that ‘key interest rates will probably be raised even more’, with the pace this occurs depending ‘on how the economy develops and what kind of information is obtained on the development of inflation.’

Inflation ‘has extended to almost all goods and services’, so that it will also be high next year despite weaker energy prices, he said.

Although monetary policy can hardly affect energy prices, which are behind most of current inflation, the ECB has to respond to the widespread rise in prices, also to keep expectations anchored, he said.

‘In the longer term, the development of wage inflation is key’, he said. Whilst natural for workers to want to compensate for inflation, the potential outcome is a wage-price spiral, he warned.

‘If the anchor does not hold, achieving the inflation target in the medium term will become more expensive in terms of the real economy, as it would lead to a tighter monetary policy and slower economic growth’, he said.

Inflation expectations remain ‘around 2%, although they have risen somewhat’, he said. ‘Confidence in the ECB's monetary policy has therefore been preserved.’

Rehn described European economic prospects as ‘currently rather bleak.’ The latest data suggest that the area is between the baseline projections of September and the alternative, downside scenario published in conjunction with the baseline, he said.

‘Therefore, the euro area is in danger of drifting into recession during the winter - how mild or deep, largely depends on the development of the energy crisis and the solutions to alleviate it’, he said.