ECB's Rehn: Keeping Inflation Expectations Anchored Is Crucial

Olli Rehn, European Central Bank Governing Council member and Governor of the Bank of Finland, emphasized in written remarks released on Wednesday that maintaining firmly anchored inflation expectations is a core task of monetary policy in the current complex economic environment. He noted that in the "intermediate zone" of frequent and directionally shifting supply shocks, correctly calibrating the policy response is crucial, and any signs of de-anchoring in long-term inflation expectations warrant and require a decisive response from central banks.

**Policy calibration needs close monitoring of expectation indicators**

Rehn argued that in a context where shocks are harder to interpret and may shift rapidly, monetary policy should pay more attention to inflation expectations. He explicitly stated that inflation expectations are an important component of monitored data, and in the face of large-scale and persistent shocks, a forceful response before signs of de-anchoring emerge may be appropriate. However, he also cautioned that over-reliance on stable long-term expectations could lead policymakers to delay reacting to inflation already felt by the public, thus requiring a balanced approach.

**Geopolitical risks pose a potential threat**

Rehn has previously issued multiple warnings about the risk of inflation expectations becoming unanchored. According to market reports, he has said that if geopolitical conflicts continue to intensify and trigger second-round effects on prices and wages, causing inflation expectations to deviate significantly from target, the ECB would have to take actions such as raising interest rates to maintain credibility. However, he has also noted that there is currently little evidence that high inflation is taking root in the euro area, or that the economy is sliding into an "adverse scenario" of slowing growth and rising inflation.

**Euro area economy shows resilience**

Despite challenges such as energy shocks and trade frictions, Rehn acknowledged the resilience of the euro area economy. He pointed out that Europe has built stronger resilience to risks, and inflation expectations are anchored closer to the 2% target, which helps protect the economy from undue second-round effects of imported energy shocks. The clean energy transition is also beginning to change the transmission mechanism of shocks, allowing monetary policy to focus more on the core task of stabilizing prices through interest rates.