On Thursday, during an OMFIF gathering in London, Rehn remarked that the surge in energy prices has so far largely avoided broad diffusion across the wider economy. He called wage growth in the euro area moderate and noted there have been no second-round effects so far. He warned the energy shock is still unfolding and said "upward risks may be creeping in." Rehn added that monetary policy will proceed with a steady hand to secure price stability and in doing so support sustainable growth and jobs. He also acknowledged the strain households feel from higher oil and gas costs.
The ECB raised borrowing costs last week - the second increase since the Middle East conflict began - a move Rehn said was justified given inflation is still above target and risks remain. He added that, to date, the inflation hit from the energy shock has proved milder than feared. Financial conditions have tightened of late, which he described as an important factor, and a global bond slide has driven euro-zone yields sharply higher.
Rehn - who previously served as an EU commissioner - noted that within the ECB there is concern over governments' widespread consumer subsidies. The central bank has urged that fiscal steps be temporary, targeted and tailored, and Rehn cautioned that expanding subsidies could slow the green transition.
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Forecasts released last week indicated higher inflation in 2027 and 2028, and the rate for 2028 is now a little above the 2% goal. Growth forecasts were also raised. People familiar with officials' thinking said last week that more rate increases are expected, though the path will depend on incoming data. Market pricing implies no fewer than three more quarter-point moves over the next 12 months.
Ireland's central bank governor, Gabriel Makhlouf, told Bloomberg Television that he would not rule out another hike as soon as next month if warranted, calling every gathering a live meeting. Rehn said the ECB's toolkit to safeguard policy transmission remains viable, citing the Transmission Protection Instrument (TPI) and OMT, though he does not currently see a need to use them. For everyday investors, higher projected inflation, tighter financial conditions and market bets on several 25 basis point hikes add up to a rates backdrop that could stay lively as data roll in.
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