Normalizing ECB policy must wait — Rehn

EUROPEAN Central Bank (ECB) officials must bear in mind their previous premature interest-rate hikes and the market turmoil around the US Federal Reserve’s tapering of bond purchases when they eventually start to tighten monetary policy, Bank of Finland Governor Olli Rehn warned.

“The core inflation rate remains low and clearly below the ECB’s price-stability target,” Mr. Rehn wrote in a book published in Helsinki on Monday. “Normalizing monetary policy awaits its turn, even though it would be important to increase the room for maneuver in monetary policy before the next recession.”

Mr. Rehn’s argument refers back to two rate hikes in 2011 under the then-president of the ECB, Jean-Claude Trichet, just before the euro zone tipped into a debt crisis and recession. The increases were immediately unwound at the end of the year by his successor, Mario Draghi. The Fed sent shockwaves through global markets two years later when then-Chair Ben Bernanke said bond purchases may be gradually phased out.

The Finnish governor was an early backer of monetary stimulus this year to overcome a euro-area slowdown driven by uncertainties over the US-China trade war and Brexit. That stance highlighted his transition from a politician who earned a reputation for advocating austerity — he spent much of the region’s crisis years the European Union commissioner for economic and monetary affairs.

The ECB ultimately agreed a rate cut and the resumption of asset purchases last month in a decision which split the Governing Council. It pledged not to end quantitative easing and start raising rates until inflation is solidly entrenched.

Mr. Draghi holds his final policy meeting this week before handing over to Christine Lagarde.

Both have insisted that governments also need to step up with fiscal stimulus to revive growth and inflation.

Mr. Rehn’s book largely addresses the euro zone’s failures during the debt crisis, arguing that politicians should have moved quickly to stem contagion and protect more risk-prone countries. The next step should have been to reinforce bank balance sheets and capital buffers, and then to push through a controlled restructuring of Greek debt.

His recommendations for the future include a focus on financial stability, including completing the banking union; a large joint fiscal capacity and lender of last resort; broader macroprudential tools to tackle shadow banking and pay-day loan companies; more-credible fiscal rules; and stronger coordination of fiscal policies.

“Europeans deserve better decisions than we were able to take during the euro crisis,” Mr. Rehn said in the book. “But first they need to wake up to see why euro-zone reform is important and how it should be done.” — Bloomberg

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