ECB Should Hike in July and Get Rate to Zero Soon, Rehn Says

(Bloomberg) -- One of the European Central Bank's more dovish officials spoke out in favor of an interest-rate increase in July, suggesting a growing shift on the Governing Council toward such a move.

Olli Rehn, the Bank of Finland governor and a former European Union commissioner for economic affairs, added that the euro zone should aim to exit subzero monetary policy by the fall, signaling a subsequent move in September.

“It would be justified to raise the deposit rate by 0.25 percentage points and it would be at zero when the autumn comes,” he told the Helsingin Sanomat newspaper in an interview published Thursday. “After this, monetary policy normalization could be continued gradually and in a pre-emptive manner.”

ECB Executive Board member Isabel Schnabel also suggested this week that such a move could happen as soon as July, while Vice President Luis de Guindos said it was possible though not likely. 

Other policy makers have said a hike could come early in the third quarter. Taken together, such comments hint at some coalescing around the timing of their first increase in more than a decade.

“It's not enough to talk now -- we have to act,” Schnabel told German newspaper Handelsblatt in an article published Tuesday. “From today's perspective, I think a rate hike in July is possible.”

The remarks follow a frenzy of interest-rate increases this week throughout the global economy, including a half-point move by the U.S. Federal Reserve and a fourth consecutive hike by the Bank of England. 

German two-year bonds erased their gains after the publication of Rehn's comments. Money markets are almost fully pricing quarter-point ECB hikes in both July and September, with another to follow by December.

By contrast, Executive Board member Fabio Panetta signaled greater caution in an interview with Italian newspaper La Stampa published on Thursday.  

In the starkest warning yet from the ECB of the damage being wrought by the war in Ukraine, Panetta said that the region's economy is “de facto stagnating.”

“This makes the choices facing the ECB more complicated, as a monetary tightening aimed at containing inflation would end up hampering growth that is already weakening,” he said.

Chief Economist Philip Lane said in a speech Thursday that the timeline to normalize monetary policy is “intrinsically uncertain.” 

ECB officials accelerated their exit from ultra-accommodative stimulus earlier this year as euro-area inflation surged to fresh records, driven largely by high energy prices and Russia's war in Ukraine. In April, prices rose 7.5% from a year earlier -- nearly four times the ECB's 2% goal. 

“This affects popular psychology, or inflation expectations, which are important to be kept steady,” Rehn said. “Next year looks challenging, and in the worst case the euro area may face a recession, so we should not delay normalization of monetary policy.”

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