Rehn: Monetary policy is ineffective against energy-driven inflation

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Rehn: Monetary policy is ineffective against energy-driven inflation

Governor Olli Rehn spoke during an event in the Bank of Finland in March 2021. Rehn on Monday told YLE that Europe is presently trying not to make the same mistakes it did in the wake of the latest financial crisis and react to rising energy prices with interest rate hikes. (Vesa Moilanen – Lehtikuva)

THE EUROPEAN Central Bank (ECB) does not have too many tools at its disposal to rein in inflation that is driven primarily by energy prices, according to Olli Rehn, the governor of the Bank of Finland.

“Monetary policy really isn’t a tool that could affect energy prices,” he said on YLE A-studio on Monday.

Europe, he estimated, is currently trying to avoid repeating the mistakes it made in the aftermath of the latest financial crisis. The ECB at the time reacted to increasing energy prices by raising its interest rates, unlike the US Federal Reserve.

“It contributed to Europe sliding into a double recession. And it also affected the duration of the debt crisis,” said Rehn. “The US economy continued to grow without inflation getting out of control.”

A member of the ECB Governing Council, Rehn viewed that the monetary authority will not resort to interest rate hikes until the end of this year.

“If Russia’s invasion doesn’t cause a major blackthorn winter for the European economy, we’ll continue normalising the monetary policy gradually. An interest rate increase can thus be expected either toward the end of this year or early next year,” he commented to the public broadcasting company.

Helsingin Sanomat on Sunday highlighted that Euribor rates have already risen visibly as a consequence of accelerating inflation and expectations of a return to a period of stricter monetary policy. While the increases have been relatively modest for shorter-term rates, the 12-month rate – the most common reference rate for housing loans in Finland – has crept up by 0.2 percentage points to -0.2 since early February.

The pace picked up yet again a couple of weeks ago, after preliminary statistics revealed that inflation in the eurozone had risen to 5.8 per cent in February. Sanctions imposed on Russia over its invasion of Ukraine are expected to accelerate inflation further by pushing up energy and raw material prices.

The ECB’s primary target is to maintain price stability by keeping inflation at around two per cent in the medium term.

The monetary authority announced almost two weeks ago it will end its asset purchases – a key element of its recent stimulus-oriented policy approach – ahead of schedule, in the third quarter of the year, reflecting its concern about inflation.

Aleksi Teivainen – HT

Source: www.helsinkitimes.fi

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