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ECB needs to raise rates sharply in October; Neutral rates should be reached this year, Rehn says

Balazs Koranyi and Anne Kauranen

HELSINKI (Reuters) – The European Central Bank must continue to raise rates rapidly to curb Inflation is likely to reach levels where it no longer stimulates the economy before Christmas, Finland’s central bank governor Oli Rehn said in an interview.

The European Central Bank has raised interest rates by a total of 125 basis points in the past two meetings, the fastest pace of tightening policy and a record high, but inflation is far from The peak is still months away, suggesting more tightening from a bank that started raising rates after most of its top peers.

“There is reason to decide to hike rates again, either by 75 or by 50 basis points Or something else,” Wren told Reuters, without elaborating on what “something else” might mean.

“I was in favor of incrementalism until the beginning of the year, but now, there is a stronger case for early and firm action,” said Rehn, who is generally considered 25 moderate swing voters on the member management committee.

Following the October move, the ECB should take another step by adopting what policymakers call a neutral interest rate that neither stimulates nor slows growth, ending a decade-long Years of experimentation with ultra-easy policy.

“In my opinion, we are heading towards a pre-Christmas neutral rate range,” potential Finnish presidential candidate 60 Wren said who often tops the polls.

“Once we get there, we’ll see if there are cases of entry into restricted territory,” he said.

“If we think the inflation outlook needs to move into restrictive territory, so be it.”

Neutral rate between 1.5%, though undefined and 2%, well above the ECB’s 0.60% deposit rate.

The market now expects it to hit 2% by the end of the year, before rising to over 3% next spring as inflation approaches 10% and is expected to remain above the ECB’s 2% target by 2024.

Wren, however, played down concerns about long-term inflation, arguing that expectations remain “largely anchored” around the target and wage growth, a prerequisite for durable price growth, is missing.

“For euro area inflation, there is one driver above the rest, one anchor more important than others,” Wren said. “The driver is clearly energy. The anchor so far has been relatively modest wage inflation.”

European labor markets may be tight, but far better than in the U.S., driving policy divergence between the ECB and the U.S. between the Fed.

In addition to raising interest rates, the ECB may also need to change the way it compensates for excess liquidity, especially over 2 trillion euros ($1). 91 trillion) Loans to commercial banks, usually with zero or negative interest rates.

Banks can now earn positive returns simply by depositing cash at the central bank, calls by some, including French central bank governor François Villeroy de Garau Change the terms as the lender will receive a substantial risk-free return

“In the current and future context, it can be said that the terms are very favorable for the bank and I am in favour of investigating the matter,” Wren

While a downturn is increasingly likely to turn into a recession due to high energy prices and potential energy shortages, Wren believes that is still a small price to pay.

“Our suffering is very, very limited compared to the suffering of Ukrainians as a result of Russia’s illegal and barbaric aggression and war.”

For Rehn’s Q&A, please click:

($1=1.0453 EUR)



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