ECB’s Rehn: To Follow the Data, Keep Rates Restrictive as Long as Necessary

16 June 2023

By David Barwick – FRANKFURT (Econostream) – The European Central Bank will set policy on the basis of data so as to ensure the timely restoration of price stability, ECB Governing Council member Olli Rehn said on Friday.

In a speech at a conference in Helsinki, Rehn, who heads the Bank of Finland, hewed closely to the most recent messaging of the ECB, noting the persistence of price pressures but assuring that headline HICP would continue subsiding in the direction of a 2025 reading of 2.2%, in keeping with the latest macroeconomic projections.

‘The Governing Council’s future decisions will continue to follow a data-dependent approach’, he said. ‘They will ensure that the key ECB interest rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary.’

However, he said, the question is whether, once price stability has been restored, borrowing costs would stay at the higher levels once considered normal or instead fall back to what has been more standard since 2008.

This depended on the natural rate of interest r*, which was being driven by structural factors, he said. This led to the conclusion ‘that the natural rate will remain close to the pre-pandemic levels once the current inflationary pressures subside’, he said. ‘This implies that the challenges for monetary policy, particularly from the effective lower bound, are likely to persist.’