Bank of Finland governor Olli Rehn has warned that inflation in the euro area could turn out weaker than expected, leaving the European Central Bank (ECB) with room to extend interest rate cuts in the coming months.
Speaking to Finnish daily Helsingin Sanomat on Sunday (31 August), Rehn, who sits on the ECB’s governing council, said that the euro’s strength, cheaper energy and slowing core inflation all point to “downward risks” to prices.
“If the risks materialise, the ECB could justify extending its interest rate cuts,” Rehn said, explaining that the central bank would decide policy “meeting by meeting” on the basis of incoming data.
The ECB is widely expected to leave borrowing costs at two percent at the next governing council meeting taking place in two weeks.
Inflation has hovered close to the ECB’s two percent target in recent months, while growth has proved resilient.
But on Sunday, Rehn warned of “downside risks to inflation.”
“The economic shocks of the euro area are now more complex than before and there is a high uncertainty about inflation, which is why we need to be agile to react to changes in the economy,” he said.
Over the past year the ECB has lowered its key rate in eight steps, from four percent to two percent.
Rehn said the ECB’s rate cuts were finally making themselves felt, with real wages rising and households regaining some purchasing power.
Extra defence spending, he added, could cushion the blow from Washington’s tariffs on European exports which could lower growth over the coming months.
Trade policy itself, he suggested, was now a key factor shaping inflation. US tariffs on European goods have so far pushed up prices mainly in America.
The higher duties imposed by the United States have mostly lifted prices for American consumers, while the EU’s choice not to retaliate means imported US goods remain unchanged in Europe. If China starts redirecting more of its exports towards Europe, that could even push prices down in the eurozone.
Rehn also pointed to Donald Trump’s repeated attacks on the Federal Reserve. A row over the alleged resignation of Fed governor Lisa Cook last week is threatening the bank’s independence.
“Market confidence is largely based on the central bank being able to make monetary policy decisions independently without political pressure.,” he said, warning that any loss of Fed independence could roil global markets.
“The consequences can be very serious,” he said.
In Europe the independence of the ECB and national central banks is enshrined in EU law, binding governments not to interfere in monetary policy.
Wester is a journalist from the Netherlands with a focus on the green economy. He joined EUobserver in September 2021. Previously he was editor-in-chief of Vice, Motherboard, a science-based website, and climate economy journalist for The Correspondent.
Wester is a journalist from the Netherlands with a focus on the green economy. He joined EUobserver in September 2021. Previously he was editor-in-chief of Vice, Motherboard, a science-based website, and climate economy journalist for The Correspondent.