ECB member pushes for quick move to raise rates, says Russia-Ukraine war could derail recovery
The European Central Bank should move quickly to raise interest rates in order to tackle soaring inflation, according to Finland’s central bank chief.
His comments come as the U.S. Federal Reserve and the Bank of England’s tightening cycle intensifies pressure on the ECB to follow suit.
“We have a conflict in pressures in monetary policy,” Olli Rehn, governor of the Bank of Finland and member of the Governing Council of the ECB, told CNBC’s Silvia Amaro on Friday.
“We are almost in between a rock and a hard place so that on one hand we have to ensure that the recovery will continue. On the other hand, we have to prevent higher inflation expectations being entrenched and being reflected in the labor market,” Rehn said.
“In other words, we have to avoid second-round effects. Therefore, in my view, we should move relatively quickly to zero and continue our gradual process of normalization of monetary policy as we have done,” he continued.
“Of course, all this on the condition that Russia’s war in Ukraine will not substantially escalate and intensify which could derail all the forecasts and the economic recovery.”
Like many central banks around the world, the ECB is seeking to steer the euro zone economy through an inflation surge that has been exacerbated by Russia’s unprovoked onslaught in Ukraine.
The U.S. central bank on Wednesday raised its benchmark interest rate to a target rate range of between 0.75% and 1%. It marked the Fed’s biggest rate hike in two decades and its most aggressive step yet in its fight against a 40-year high in inflation.
Shortly thereafter, the Bank of England raised interest rates to their highest level in 13 years. The Bank also warned about the prospect of a recession and said U.K. inflation could soon hit 10%.
Inflation in the euro zone climbed to 7.5% in April, almost four times the ECB’s target level, prompting questions over how the ECB will react. The central bank’s next meeting is on June 9, with another meeting slated for July 21.
Last month, European Central Bank Vice President Luis de Guindos tried to reassure lawmakers over rising prices, saying the euro zone is close to reaching peak inflation. The central bank sees price pressures cooling in the second half of the year, although energy costs are expected to keep inflation relatively high.
Finnish central bank chief Olli Rehn says the ECB should move quickly to raise interest rates.
Picture Alliance | Picture Alliance | Getty Images
The ECB last raised interest rates in 2011 and it has kept its benchmark deposit facility rate, currently at -0.5%, in negative territory for nearly a decade.
When asked whether he believed it will be possible for hawkish ECB members to convince more dovish colleagues to approve a rate rise in July, Rehn replied: “We have always very constructive and intensive discussions based on the incoming data and then we analyze what is the best course of action.”
“These deliberations usually lead to unified, consensual decisions and I am sure that we will all do our best in order to come to such a universal consensual decision in June, in July — and even after that,” Rehn said.
Finland and Sweden are both exploring the potential of joining the U.S.-led military alliance of NATO in the wake of Russia’s onslaught of Ukraine.
The leaders of the two Nordic countries have previously warned Europe’s security landscape had “completely changed” since Russia invaded on Feb. 24.
A decision from both countries about whether to apply to join NATO is expected this month.
“The critical factor here is of course the aggressive and unpredictable behavior of Russia and its leadership and its war in Ukraine. But at the same time, there is also the broader issue of Russia wanting to create again spheres of influence in Europe and that does not belong to 21st century Europe,” Rehn said.
“So, these are the reasons why the Finnish people and I think increasingly the Swedish people are in favor of defensive alignment, i.e., NATO membership,” he continued. “My assumption is that the leadership of the country and the parliament are moving towards NATO membership.”