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(Bloomberg) — European Central Bank Governing Council Member Olli Rehn said it’s “clear” that monetary policy must react fast to any signs of inflation becoming entrenched in the economy through higher wages and prices.
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While there are “no obvious signs” of such impacts yet and in the short term, the ECB is closely monitoring the possible emergence of the so-called second-round effects, Rehn said in an interview on Finland’s YLE TV1 on Saturday.
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“If we see that happening, it’s clear that monetary policy must react forcefully and quickly,” he said. “At the moment, market forces are doing a part of the central bank’s work, as market rates have already gone up somewhat.”
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ECB policymakers are likely to raise interest rates at their next meeting in June unless there are positive developments on energy prices and ending the Iran war, people familiar with the situation told Bloomberg after the central bank’s rate decision on Thursday.
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President Christine Lagarde signaled earlier that day that the ECB will consider an increase in borrowing costs in June after debating and rejecting one on Thursday as it held the deposit rate at 2%. Officials will get updated projections at their next meeting, when economists and investors see them opting for a quarter-point hike.
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“But I emphasize that the ECB’s Governing Council isn’t led by market forces,” Rehn said on Saturday. “We make decisions based on what we assess to be the best for the European economy, most importantly price stability, but also sustainable growth and employment.”
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The ramp-up in oil and natural gas costs has not yet triggered second-round effects — even as headline inflation has jumped to 3%.
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Rehn said he estimates that the prospects for inflation will become clearer in May and June — either the Middle East crisis extends, leading to more persistent consumer-price gains, or resolves earlier.
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The “ECB’s Governing Council will nevertheless ensure that inflation is stabilized in the medium term,” he said.
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