The European Central Bank (ECB) should start raising borrowing costs in July to prevent inflation expectations becoming de-anchored, Governing Council member Olli Rehn said.
“We are seeing signs of second-round effects,” Rehn said in an interview in Salzburg, Austria, where he attended the Global Europe seminar. “It’s important that we send a signal that these higher inflation expectations we are currently witnessing will not become entrenched.”
The Bank of Finland governor said it is “reasonable that we will rather sooner, in my view in July, start raising rates in line with our normalization of monetary policy, and would expect that when autumn comes, we would be at zero.”
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Faced with record inflation — driven partly by Russia’s invasion of Ukraine — ECB officials are increasingly coalescing around a July rate increase, with even historically more dovish Governing Council members such as Rehn backing such a move.
The prospect of the first hike in more than a decade is stoking concerns of a blowout in the bond yields of weaker eurozone economies.
The ECB’s staff are designing a backstop that would be available to use against debt-market stress caused by shocks outside the control of individual governments.
What “we would have in our toolbox in reserve” is “a kind of instrument that would help to counter possible unwarranted fragmentation of financial conditions in Europe,” Rehn said.
Still, he said that he would make “the case for outlining certain principles of an instrument without creating yet a legal instrument, because we don’t know the precise nature of the crisis.”
The war in Ukraine is hampering the region’s rebound from the COVID-19 pandemic. The ECB is due to publish new economic projections next month after already lowering its growth forecasts in March.
“We are seeing some stagflation tendencies,” Rehn said.
The Governing Council should ensure that monetary decisions do not derail economic growth, but also avoid inflation becoming entrenched, he added.
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