By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Olli Rehn said Friday the decision to leave interest rates unchanged in October was warranted, with underlying inflation relatively stable, wage pressures contained and tighter financial conditions weighing on both inflation and growth.
Rehn, who heads the Bank of Finland, said in a blog post on his institution's website that the energy shock nevertheless remained unfinished and policymakers needed to watch closely for any transmission of renewed energy price increases into other prices and wages.
“The energy shock is not over,” he said, warning that its effects could “creep in unnoticed like a cat in socks.”
According to Rehn, euro area inflation accelerated to 3.8% in September as oil and European natural gas prices rose sharply, with energy prices expected to keep headline inflation clearly above the ECB’s target in the near term.
He said the critical issue for the persistence and entrenchment of inflation was whether higher energy prices fed through to other prices or wages, adding that policymakers had so far seen no evidence of that.
Longer-term market inflation expectations had also remained stable, Rehn said, although upside inflation risks were still clearly elevated as the Middle East crisis persisted and the second wave of the energy shock increased the probability of indirect effects.
On growth, Rehn said the euro area economy had remained resilient through the second quarter and the latest data pointed to continued moderate growth in the second half, supported by artificial intelligence investment and higher European defense spending.
But renewed energy price increases, higher long-term interest rates and weakening consumer confidence had increased downside risks to the growth outlook, he said.
Rehn said labor markets were not especially tight, with wage forecasts and forward-looking indicators pointing to relatively moderate wage growth, while unemployment remained stable and the vacancy rate was close to its long-term average.
Euro area financial conditions had meanwhile tightened as previous ECB rate increases continued to feed through normally to market rates and global long-term yields, including euro area sovereign yields, had risen, he said.
That tightening was helping slow both growth and inflation, according to Rehn, who said the ECB would receive considerably more information on activity and inflation as well as a new set of projections before its December meeting.
Future decisions would continue to be taken meeting by meeting on the basis of incoming data, analysis and overall judgment, with particular attention to the inflation outlook and related risks, underlying inflation dynamics and the strength of monetary policy transmission, he said.
Turning to ECB President Christine Lagarde’s announcement that she will leave office in February, Rehn described her as an “energetic collaborative leader in times of crisis” and “an excellent team builder” who had united the Governing Council.