ECB’s Rehn Calls for Rate Hikes Beyond March, Sees Terminal Rate Reached in Summer
20 February 2023
By David Barwick – FRANKFURT (Econostream) – The European Central Bank needs to hike interest rates beyond March in view of high core inflation, but should reach the terminal rate in the summer, ECB Governing Council member Olli Rehn said on Friday.
In an interview with German business daily Börsenzeitung, Rehn, who heads the Bank of Finland, said, ‘We must not let up too early.’ With an eye towards the experience of the US in the 1980s, he said, ‘We as the Governing Council must avoid such shock therapy and act preventively instead. We must preventively and continuously raise our interest rates in order to keep inflation expectations under control and prevent a wage-price spiral.’
Rehn acknowledged the possible economic cost of more monetary tightening. ‘But that is the better alternative to later shock therapy and very high unemployment’, he said.
The updated staff forecasts to be released next month would show more growth and less inflation, he indicated. Still, he made clear that this was no reason to relax.
‘With such high inflation, further interest rate hikes beyond March seem likely, logical and appropriate’, he said. ‘It is hard to imagine that we will stop raising interest rates as long as the core inflation rate continues to rise and is so high.’
The terminal rate would be reached ‘over the course of the summer’. With rates currently not yet restrictive, the ECB must ‘not be too hasty in discussing interest rate cuts’, he was quoted as saying.
The ECB has to ‘be careful and monitor wage developments very closely’, he said, according to the newspaper. ‘It is crucial that wages only rise so much that the economy remains competitive and a wage-price spiral is avoided. Otherwise we would have to take even stronger countermeasures if necessary.’