ECB council member Olli Rehn warns that the European Central Bank (ECB) will relax too early in its fight against inflation. “We have to increase our interest rates as a precaution and continuously in order to keep inflation expectations under control and prevent a wage-price spiral,” Rehn told the “Börsen-Zeitung”. “That may mean slightly lower growth now. But that’s the better alternative to later shock therapy and very high unemployment.”
At the beginning of February, the ECB raised interest rates for the fifth time in a row and announced a further increase of 0.5 points for the meeting on March 16th. The key interest rate in the euro area is now 3 percent. Higher interest rates make loans more expensive. This can slow down demand and counteract high inflation rates. At the same time, higher interest rates on loans can lead to investments being postponed and economic growth being weaker.
Don’t let up too soon
Inflation in the euro zone has been well above the ECB’s medium-term target of two percent for months, even though inflation has recently weakened. In January, consumer prices in the euro area were 8.5 percent higher than in the same month last year.
“With inflation this high, further rate hikes beyond March seem likely, logical and appropriate,” said Finland’s central bank governor Rehn. “As things stand at present, I assume that we will reach the peak of the current interest rate cycle in the course of the summer.” It takes “stamina and tenacity in the fight against inflation,” warned Rehn. “We must not let up too soon.”
The position of the euro
The euro, meanwhile, has moved little. In the afternoon, the common currency was trading at $1.0686. The euro had already moved at this level in the morning. The European Central Bank set the reference rate at 1.0674 (Friday: 1.0625) dollars. The dollar thus cost 0.9369 (0.9412) euros.
