Rehn Sees Limits of ECB's Capacity to Boost Economic Growth
Rehn Sees Limits of ECB's Capacity to Boost Economic Growth
(Bloomberg) --
European Central Bank Governing Council member Olli Rehn warned the combination of persistently slow inflation and interest rates at zero may hamper the effectiveness of monetary policy.
“We should take care to avoid the sort of harmful equilibrium that arises from prolonged low inflation and zero interest rates, as this would significantly constrain the capacity for monetary policy to balance the economic cycle,” Rehn said in a press release distributed by the Bank of Finland on Thursday.
“This would bring about a lengthy shortfall in economic growth with respect to its potential and hinder efforts to boost employment,” he said.
The ECB last month deployed a package of monetary-policy tools to increase stimulus to the ailing euro-area economy. That will keep financing conditions favorable, Rehn said.
But since then, the outlook in Germany, the biggest member of the single-currency area, has dimmed further. A manufacturing slump has deepened in the monetary bloc and the U.S. has slapped new tariffs on European Union products.
The Governing Council’s decision appears to be mired in controversy, and has prompted outgoing President Mario Draghi to caution that discord among ECB officials could undermine the effectiveness of monetary policy. Draghi in September insisted on a new round of quantitative easing against opposition from governors whose countries make more than half the euro zone’s population.
Among the dissenters were Executive Board member Sabine Lautenschlaeger, who unexpectedly quit last week. The German lawyer, a long-time opponent of quantitative easing, gave no reason for leaving more than two years before her term ended.
Rehn also signaled there may be a way to promote agreement among policy makers once more: a strategy review he’s been pushing for the past year. There’s now “broad consensus” that it’s needed, he said.
“Successful implementation of the strategy review will deepen the research-based knowledge underpinning the monetary policy strategy and thus help strengthen the common understanding on policy within the Governing Council,” he said. “The review process should thus contribute to better monetary policy decision-making and support consistent communication.”
To contact the reporters on this story: Kati Pohjanpalo in Helsinki at kpohjanpalo@bloomberg.net;Leo Laikola in Helsinki at llaikola@bloomberg.net
To contact the editors responsible for this story: Tasneem Hanfi Brögger at tbrogger@bloomberg.net, Brian Swint, Catherine Bosley
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