HELSINKI (Reuters) - The European Central Bank should not tie its hands too early when it comes to future monetary policy decisions but look instead at how the economy pans out, Finland’s new central bank governor Olli Rehn told Reuters on Tuesday.
The ECB said last month it expects to end its 2.6 trillion euro ($3.0 trillion) bond-buying program at the end of the year and to keep interest rates at their current, record low level “through the summer of 2019”, leading investors to price in a hike in October of next year.
The 56-year-old Rehn, who succeeded Erkki Liikanen as the Bank of Finland governor last week, backed the current market expectations but said any decision should depend on economic data in the intervening time.
“I think it’s indeed important to underline the data-dependent nature of decision-making,” he said in an interview.
“I recognize the importance of forward guidance, but on the other hand, it is wise in monetary policy not to tie one’s hands too early if there’s no need.”
Reuters reported last week that ECB policymakers were split over the timing of their first rate hike since 2011 and about the meaning of “through the summer”.
Some said an increase, which would mark a turning point after years of aggressive monetary stimulus, was possible as early as July 2019, but others ruled out a move until autumn, several sources said.
Rehn, who worked as the EU’s top economic official during the euro zone debt crisis, said markets were interpreting the guidance correctly as they price in a rate hike for October next year.
“The ECB has shown by its actions that its communication is correct and credible ... The markets seem to be reading the forward guidance of the ECB correctly.”
Regarding the European economy, Rehn said that while fundamentals were in pretty good shape, a growing trade war between the United States and China is a cloud over the global outlook.
“In protectionism, we have seen a shift from rhetoric to reality. So far we (in Europe) have experienced negative confidence impact, but not yet the worst scenario,” he said.
As the EU’s economic and monetary affairs commissioner, Rehn developed a reputation for advocating strict fiscal discipline and structural reforms for troubled European states.
Having also participated in the early planning of the banking union, he said the euro zone should complete it by creating the missing piece, a joint deposit guarantee scheme, without unnecessary delays.
“We should have this overall constructed - if not fully completed, then well in the process of being completed, before the next recession hits.”
European Union leaders last month failed to reach an agreement on the deposit insurance scheme for the euro area, partly due to German opposition.
The Finnish government also wants first to see progress in risk reduction in the area before backing the scheme, which would make bank depositors equally safe across the single currency area.
Turning to the Nordics, Rehn said the region will see further financial integration in the coming years. He also favored the idea of Sweden and Denmark participating in the banking union.
“It would help to ensure financial stability and a level playing field in supervision and regulation in the Nordic banking sector and financial industry.”
Sweden and Denmark do not use the euro but they are considering joining the banking union.
Reporting by Jussi Rosendahl; Editing by Kevin Liffey