ECB’s Välimäki: Unclear Whether a September Hike Would Be Too Much or a Pause Too Little

29 August 2023

By David Barwick – FRANKFURT (Econostream) – It is still unclear which of the choices facing the European Central Bank at its upcoming monetary policy meeting is to be preferred, ECB Governing Council member Tuomas Välimäki said on Tuesday.

In remarks at a press conference of the Bank of Finland, board member Tuomas Välimäki, who is occupying the position of Governor Olli Rehn whilst the latter runs as a candidate in Finland’s 2024 presidential election, said that although current monetary policy would probably one day be ‘severely criticised’ with the benefit of hindsight, it was ‘still unclear, at least to me, whether the probability and risk of a mistake is higher, i.e. whether the ECB's rate hike in September would be too much of a measure or whether leaving policy rates unchanged would be too little.’

‘Thus, the line taken at the most recent Governing Council meetings remains appropriate’, he said. ‘The Council will make monetary policy decisions meeting by meeting according to the latest available data. Future decisions will be based on the inflation outlook, an analysis of the dynamics of underlying inflation and an assessment of how the monetary policy actions already taken will be transmitted to the economy and prices.’

Despite the restrictiveness of current interest rates, if it nonetheless ended up taking too long to restore price stability, this ‘could raise expectations of future inflation and thereby accelerate inflation above the projected rate’, he cautioned.

The resulting need to tighten policy ‘well beyond current expectations’ envision ‘would have very negative consequences for the economy’, he cautioned.

At the same time, whilst another hike could hasten the return to stable prices, it would entail the risk that ‘aggregate demand could contract unnecessarily and that inflation could fall significantly below target in the future’, he said.

The reduction of the Eurosystem’s balance sheet had the potential to give rise to ‘new challenges’, as this return to relative normalcy would not necessarily be symmetrical with the previous expansion of the balance sheet, he said.

‘So far, this process has gone well, but we are still in the early stages’, he said. ‘For this reason, the balance sheet is reduced gradually and as proactively as possible. We monitor the effects of actions closely and are ready to react to possible tensions in both the government bond and money markets.’