ECB’s Rehn: Could Enter Recession in Winter; Interest Rates Likely to Rise Further

28 November 2022

By David Barwick – FRANKFURT (Econostream) – The euro area could enter recession this winter, but the European Central Bank is likely to continue hiking official interest rates, ECB Governing Council member Olli Rehn reiterated on Monday.

In remarks at a seminar at the Bank of Finland, which he heads, Rehn said that the Eurozone appeared to be ‘somewhere between’ the ECB’s baseline and adverse scenario from September, with a ‘significant’ likelihood of the latter’s realisation.

‘Thus, the euro area is at risk of being driven into a recession during the winter – how mild or severe this is will depend largely on what happens with the energy crisis and what solutions are decided for alleviating its effects’, he said.

At the same time, increasingly broad-based inflation now extends to ‘almost all goods and services’ and would thus stay relatively high in 2023, despite weaker energy prices, he said.

‘Going forward, wage inflation will be in a key role’, he said, noting tightened job markets and wage growth over the current year.

Though unable to address high energy prices directly, monetary policy has to react to overall price pressures ‘to avoid the emergence of an upward spiral in consumer prices and wages’, he said. If expectations dis-anchored, monetary policy would have to tighten even more than otherwise and ‘at a much greater cost to the real economy’, he said.

Indicators show that ‘inflation expectations have risen somewhat but are still in the proximity of 2%’, suggesting confidence in the ECB, he said.

‘Key ECB interest rates are likely to be raised still further’, he said. ‘The pace at which this is done will depend on how the economy develops and what the inflation data looks like.’