ECB’s Rehn: Need Significant Rate Hikes in Coming Meetings to Restore Price Stability

16 January 2023

By David Barwick – FRANKFURT (Econostream) – The European Central Bank must hike official interest rates significantly at its coming monetary policy meetings, ECB Governing Council member Olli Rehn said on Monday.

In a column on the website of the Centre for Economic Policy Research (CEPR), Rehn, who heads the Bank of Finland, said that ‘[p]olicy rates will still have to rise significantly to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target.’

‘Thus, we will stay the course’, he continued. ‘Ceteris paribus, this means significant rate hikes in the following meetings – on a meeting-by-meeting basis depending on the incoming data and changes in the outlook.’

Hiking into restrictive territory will eventually lead to easing price pressures by reducing demand and, ‘more importantly’, he said, ‘will also guard against the risk of a persistent upward shift in inflation expectations.’

The origins of elevated inflation lie with energy goods he said, but ‘more concerning, at least from the monetary policymaker’s perspective, is that inflation has spread across the entire economy – to virtually all products and services.’

Still, Rehn, noting the high uncertainty applying in particular to the near term, urged keeping ‘an open mind to adjust our policies if needed.’

What is certain, he added, is that if the economy is subject to supply constraints and expansionary fiscal policy at the same time, this will stoke inflation and ‘makes our job more demanding.’

Swift action now should make it possible to avoid the ‘Volcker shock’ of very stringent monetary policy, he said.

Inflation expectations with respect to the medium and longer term remain ‘relatively well anchored’, he said. The ECB must ensure this remains the case ‘by making strong enough moves now’ instead of having to be even more restrictive down the road, he said.