ECB Rehn has strongly encouraged the people of the European central bank to concentrate on increasing the risk of weakening inflation as eurozone nears the 2% target of the bank.
He observed that declining energy prices, reduced wage and service pressure and a strengthened euro would drag inflation down below target levels. He was quoted in an interview with Helsingin Sanomat on November 15. Rehn has also given this threat to be underestimated as officials deliberate on their subsequent policy actions.
Reduction of inflation is a policy issue
Rehn noted that the threat of inflation being too low was still real though at present, the inflation was close to the target. He also admitted the existence of contrary risks that might be elevating inflation. The next meeting does not involve any significant shift in the deposit rate by investors. Already, the rate has been decreasing eight times in the cycle that it is currently in, and has decreased to 2%. Rehn emphasized that both sides should be analyzed closely by the policymakers as the situation changes.
There is an increasing pressure on stock markets
Rehn also gave a warning on the conditions of world markets. He claimed that valuations of stock are stretched, which are primarily based on the hype on artificial intelligence in the US. He mentioned that the growth of the economy and corporate gains are not increasing equally. He opined that the gap provides vulnerability and can lead to a market correction.
He encouraged banks to keep themselves safe by keeping their capital positions high. Rehn cited a stable performance of the euro zone even after trade tension with US tariff policies. According to him, the region is still expanding albeit at a slow rate. It was also reported that he is trying to get the post of ECB vice president with the backing of Finnish Finance Minister Riikka Purra. Latvia is also intending to put forward its own candidate to the Executive Board, although it is yet to confirm whether or not Martins Kazaks will be nominated.
Disparity in development of euro zone raises concerns
New statistics indicated that euro zone experienced 0.2% growth in the third quarter. The headline figure brought about optimism of recovery reinforcement. Nonetheless, analysts determined that 49 percent of the output within the bloc was contributed by the countries that recorded no growth or contraction. There was no improvement recorded in Germany and Italy. The officials are concerned that the disparaging performance may complicate the policy decisions.
The vice President Luis de Guindos had earlier on remarked that the problem needs some close scrutiny. According to the sources, the policymakers are still wary even after eight rate cuts. They will also monitor the future risks like the possible stalling of the European Union carbon pricing plan. The statements of Rehn highlight the problem facing the ECB as inflation rates decrease and expansion is lopsided. Officials still juggle the price pressures that are declining with increased financial risks.
