ECB’s Rehn: We Said We’d Hike by 50BP in March, But We’ll Also Consider New Forecasts

3 February 2023

By David Barwick – FRANKFURT (Econostream) – The European Central Bank has said it would hike rates by another 50bp next month, but it would also take into account the updated staff macroeconomic forecasts, ECB Governing Council member Olli Rehn said on Friday.

In a speech at a seminar in Finland, Rehn, who heads the Bank of Finland, said that despite the slowdown of headline inflation, core inflation, ‘to which a lot of attention is paid in monetary policy decision-making’, was still ‘remarkably high’.

Though a wage-price spiral is not yet apparent, ‘the risk is worth being aware of’, he said. ‘In restoring the purchasing power of wages, one can only encourage moderation in order to bring inflation to the desired level - one that preserves competitiveness and jobs in an uncertain situation.’

Monetary policy was obliged to respond to the general increase of prices, also to prevent inflation expectations from disanchoring, he said.

‘We also told you yesterday that we are going to raise interest rates by half a % unit at our March meeting’, he said, referring to the outcome of the Governing Council's monetary policy meeting. ‘At the same time, we evaluate the future career of the key interest rate in the light of the latest information, i.e. our March forecast.’

Rehn observed the better-than-expected economic performance of the region, which seemed to be skirting recession. ‘The economy is estimated to recover during this year’, he said. ‘The recovery is supported by high employment in the euro area, state energy subsidies and the easing of supply bottlenecks.’

The alternative to hiking interest rates now, despite the burden of higher borrowing costs, ‘would be much worse’, he said. The deterioration of purchasing power in the wake of higher prices and the economic instability of high inflation ‘would be poison for the economy and the people.’

The ECB would prefer not having to tighten the screws excessively, he said. ‘We prefer to tighten monetary policy consistently and thus keep the price-wage spiral under control’, he said. ‘The near-term economic development may be slightly more subdued due to the rise in interest rates, but the risk of a long-term economic crisis is lower when inflation is stabilised.’