ECB Insight: Rehn, Having Missed the Memo on Data-Dependence, Predicts Interest Rate Path

26 June 2024

By David Barwick – FRANKFURT (Econostream) – It is truly remarkable to what extent European Central Bank Governing Council members diverge in their interpretation of what a data-dependent, meeting-by-meeting approach to policymaking means in practice.

In an interview with Bloomberg that the agency understatedly acknowledged yielded ‘some of the most explicit remarks from an ECB policymaker on the path for interest rates’, Bank of Finland Governor Olli Rehn endorsed current market expectations in a way that suggested he hadn’t gotten the memo regarding the ECB’s abandonment of forward guidance.

‘If you look at market data, it implies that there would be two more rate cuts so that we would end up at 3.25% by the end of this year and, with the terminal rate — somewhere around 2.25%, 2.50%’, he observed. These were ‘reasonable expectations’.

Rehn supposedly at some point in the interview paid lip service to the ECB’s determination not to commit to a particular rate path, though no actual quote or even paraphrase corroborated this.

Either way, two more rate cuts distributed between four monetary policy meetings during the rest of 2024, only two of which feature updated macroeconomic projections, doesn’t leave much to the imagination.

Technically, Rehn didn’t actually want to exclude action at the non-projection meetings (including July and October), but if one is to be honest, then one must recognise that in the absence of new forecasts, the Council is left bereft of a singularly important data point on which to base a decision.

With a large number of Council members clearly getting this, and a July move in any case virtually off the table, Rehn’s reluctance to declare non-projection meetings off-limits is empty symbolism for now.

Moreover, his attempt to take the exclusion of non-projection gatherings to its logical extreme in which the ECB ‘might as well cancel the so-called interim meetings and save fuel and save the planet’ is utterly specious; the Council has things to mull over even when the decision is a foregone conclusion, and in any case could make all meetings virtual.

But no one should kid himself and think that Rehn is really proposing any planet-saving. Were that high on his agenda, the ECB’s ‘retreat’ in February 2023 never would have taken place in faraway Lapland, a venue for which the environment has Rehn more than anyone else to thank.

Not content to bestow his blessing on expectations of two cuts by end-2024, Rehn looked even further into the future. Where most observers see uncertainty, he saw another three or four cuts in 2025, leading to a terminal rate of 2.5% or 2.25%.

Given where the ECB is now and where, according to Rehn, it is going, authorities cannot afford to be too dilatory about the easing process. And indeed, one might get the impression that this was his agenda: to ensure a steady drumbeat of rate cuts.

Most of the rest of what he said was about delivering the rationale for precisely this, warning not to over-burden firms and households, exhorting central bankers not to ‘unnecessarily delay closing of the output gap’ and reminding that the ECB’s secondary duty was ‘to support full employment, sustainable development and balanced growth.’

If anything, we wonder whether Rehn limited himself to endorsing market expectations simply because it was the most convenient way to underwrite a meaningful number of interest rate cuts. Convenient because, nominally, it’s what financial markets, not Rehn personally, anticipate. He’s merely calling it reasonable.

The tone leads us to believe that he’d be happier if he could reasonably express agreement with an even higher number of interest rate cuts.