ECB’s Rehn: ‘Uncertainty Delays Interest Rate Cuts’; Upside Inflation Risks Remain

19 July 2024

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Olli Rehn on Friday said that the lack of clarity about the inflation and geopolitical outlook led policymakers to wait for more information and that upside inflation risks remained.

In a blog post on the website of the Bank of Finland, which he heads, Rehn, under the subheading ‘Uncertainty delays interest rate cuts’, said, ‘Uncertainty about the development of inflation as well as risks related to geopolitics and the rise of protectionism favour the approach where decision-making rests on up-to-date, diverse data.’

‘We use a broad range of statistics, analyses and forecasts to support our decision-making, rather than looking at individual datapoints’, he said. ‘We are not pre-committed to a specific interest rate path.’

Rehn reaffirmed the ‘big picture’ of disinflation towards the ECB’s price stability objective, observing that expectations were ‘firmly anchored close to the target.’

At the same time, he said, the disinflation process was subject to near-term uncertainty related especially to services inflation and ‘rapid’ wage growth. ‘The risks of higher-than-forecast inflation have therefore not disappeared’, he said.

Still, he affirmed, ‘[b]y not keeping interest rates at a restrictive level for too long, we will avoid unnecessary harm to economic growth.’

Economic data of late were ‘downbeat’, he said. Euro area growth was forced to rely more and more on services as the industrial sector was ‘gloomy, and there is no sign of a pick-up’ despite the dissipation of increased energy costs, he said.

‘If euro area industry and investments do not recover soon and growth remains dependent on services, then the projected pick-up in productivity growth may also be at risk’, he warned. ‘We must also take into account the possibility that the slowdown in industrial production is not as temporary and cyclical in nature as has been assumed.’