MNI POLICY: Low Rates, Asset Buys 'Not Forever' - ECB's Rehn

By Luke Heighton

     FRANKFURT (MNI) - Low interest rates and highly accommodative monetary

policy "won't last forever", the governor of the Bank of Finland warned eurozone

policymakers in an article published Thursday, though past mistakes indicate

that an "early withdrawal" of support should be avoided.

     "For now, and apparently in the medium term, the effect of the Covid-19

pandemic is disinflationary rather than inflationary, and the danger of

deflation has re-emerged," Olli Rehn, a member of the ECB's Governing Council

wrote.

     Nevertheless, "one day the member states and their governments should be

prepared to live with less accommodation and higher rates. One should not assume

that central bank policy would then be determined by the fiscal situation."

     The European Central Bank's use of negative interest rates, asset purchases

and large-scale refinancing operations is therefore "both proportionate and

necessary," he added.

     The question of when to withdraw support is instead driven by central

banks' commitment to maintaining price stability, he continued, though before

withdrawing support "we should verify for a certain period of time that

inflation has solidly reached the medium-term price stability target."

     That target, currently defined as close to, but below 2% inflation over the

medium-term, should become a symmetrical point target of 2%, Rehn said, allowing

for some short-term inflation around it.

     Turning to the Covid-19 crisis, "excessive precautionary saving by

households, and risk aversion of companies," constitute "the main challenge"

after lockdown restrictions are lifted, Rehn said.

     Rehn, writing in the Financial Times, said it was "of paramount importance

to ensure that the new EU funding is used for the intended purposes: healthcare,

employment, sustainable development and digital transformation, and called on

the EU to use the "European Semester" - a framework for the coordination and

monitoring of economic policies across the bloc - to enforce the conditions

agreed upon in the recovery package."

     National recovery programmes should be "scrutinised for their effect on

structural reforms, innovation and investment," Rehn continued. "Policies should

be designed genuinely to enhance productivity and competitiveness."

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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