Wednesday, March 22

ECB Overreaction on Inflation Could Stymie Growth, Rehn Warns

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The European Central Bank needs to look beyond the current spike in inflation as it sets monetary policy, to avoid choking off economic growth, Governing Council member Olli Rehn said.

“If we reacted strongly to inflation in the short term, we would probably cause economic growth to stop,” Rehn said in an interview on Finland’s YLE TV1 on Saturday. “It’s better to look beyond short-term inflation and look at what inflation is in 2023, 2024,” he said, adding that price growth in the coming years could be “close to the 2% target.”

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Wage development in the euro area remains subdued and inflation is unlikely to remain permanently high unless spurred by labor costs, said Rehn, who also is the governor of the Finnish central bank.

The comments echo those of ECB President Christine Lagarde, who this week warned that a rushed tightening of monetary policy would harm the euro-area economy’s rebound from the pandemic. Policy makers privately see a change in formal guidance materializing as soon as next month, when they’ll get new economic forecasts and reassess their bond-buying.

“We will have time to react in the March meeting and in later meetings if it looks like the situation is markedly different than it now appears,” Rehn said.

Rehn, 59, said earlier this week he has pushed the Governing Council to seek faster access to euro-area wage data to make it easier to set policy at a time when inflation is mainly boosted by supply factors, such as higher energy prices, supply chain disruptions and the unraveling of pent-up demand for services after lockdowns.

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