BERLIN (dpa-AFX) – Olli Rehn, member of the Council of the European Central Bank (ECB), believes that an increase in key interest rates in the euro area this summer is right. “It is necessary to raise the key interest rate in the third quarter, probably in July,” Rehn, who is also governor of the Finnish central bank, told the daily newspaper “Welt” (Monday). “And we will continue to normalize monetary policy, provided the Russian war in Ukraine doesn’t set back the European economy.”
The main reason given by the ECB council member was the fear of second-round effects such as the wage-price spiral – i.e. the phenomenon that rising wages and prices push each other up. “We are seeing signs of second-round effects,” said Rehn – even if wages in Europe have recently not risen as much as in the United States. “We must therefore prevent inflation expectations from becoming entrenched. That is why it is important that we send the appropriate signal.”
Other ECB decision-makers recently made similar statements, including Executive Board members Fabio Panetta and Isabel Schnabel. “Now it’s not enough to talk, we have to act,” Schnabel said in an interview with the “Handelsblatt”. “From today’s perspective, I think a rate hike in July is possible.” Before that, the net purchases of bonds should be stopped, probably at the end of June.
Increases in the key interest rate make credit more expensive and curb demand. This helps bring down the rate of inflation, but it also weakens economic growth.
Currently, banks even have to pay 0.5 percent interest if they park money at the ECB. Economists expect that the central bank will probably raise this negative deposit rate to zero percent in several steps this year. The US Federal Reserve significantly increased its key interest rate by 0.5 points on Wednesday, putting Europe’s monetary authorities under further pressure./toh/DP/men