ECB’s Välimäki: Restrictiveness Still Appropriate, Mustn’t Declare Victory Prematurely

16 January 2024

By David Barwick – FRANKFURT (Econostream) – Monetary policy in the euro area needs to remain restrictive for now and it is not clear when easing will become possible, European Central Bank Governing Council member Tuomas Välimäki said on Tuesday.

In an interview with Reuters, Bank of Finland board member Välimäki, who is occupying the Governing Council position of Governor Olli Rehn whilst the latter runs as a candidate in Finland’s 2024 presidential election, said that ‘we are on the right track.’

Still, headline and in particular core inflation remained ‘faster than we can accept’, he said. ‘Thus, restrictive monetary policy is still called for.’

It was not possible to identify the date on which the data-driven ECB would deem it appropriate to modify its stance, he said.

‘We do analysis on a continuing basis and our views will evolve with incoming data’, he said. ‘We'll continue to be data-dependent, which is the correct approach to address the uncertainties around the projections.’

There were inflation risks to the upside as well as to the downside, he said. Economic prospects could deteriorate unexpectedly, but wage developments also posed a threat, he said.

‘We need to avoid declaring victory over inflation prematurely’, he said. ‘It would be better to wait and see how data on wages develop. It’s better to wait a bit longer than doing a premature exit from this restrictive level, and then perhaps to having to do a reversal. I see a clear need to get enough evidence that we are on track.’

Economic data and the ECB’s projections needed to confirm inflation subsiding to a level consistent with the ECB’s mandate, he said.

As for market views of imminent policy easing, ‘time will tell who was right and views will converge’, he said. ‘If our baseline forecasts are correct and market rates fall much more rapidly than what is priced into the projections, then ceteris paribus that would lead to higher inflation, and I can understand the logic of saying that it could delay monetary easing. But this is dependent on our forecast being more correct than those of the market, and that's certainly what we believe in.’

Välimäki argued against putting minimum reserve requirements into the service of monetary policy. The review of the operational framework now underway ‘will provide a good opportunity also to think about the role of required reserves in our operational framework’, he said. ‘The reserve requirement can play an important role in some operational frameworks, whereas they might not be strictly needed in others. So, I think this question should and will be part of the review.’