The Bank of Finland Governor Olli Rehn cautioned against premature cash rate hikes, highlighting past mistakes.
“The core inflation rate remains low and clearly below the ECB’s price stability target,” wrote Rehn on his recently published book “Normalizing monetary policy awaits its turn, even though it would be important to increase the room for maneuver in monetary policy before the next recession,” he added.
Rehn was making a reference to Jean-Claude Trichet's rate hikes in 2011 and Mario Draghi's decision to undo them at the end of the year.
The European Central Bank is expected to meet on Thursday, being this meeting the last of Mario Draghi's tenure who is leaving the ECB by the end of the month to be succeded by Christine Lagarde. Many speculate that the ECB will insist on implementing stimulus measures since the European economy is showing signs of being about to enter into a recession. In its last meeting, the bank resolved to cut the interest rates and promised to keep implementing quantitative easing and ruled out rate hikes for the near future, at least until the end of the first half of next year. The Bank doesn't raise the cash rate since the 2008 financial crisis.
The Reuters interest rate probabilities established a 23% chance of a Cash Rate hike, favoring the idea of the Bank keeping the rates steady. A Bloomberg survey of economists on Friday shows that the analysts don't expect a cash rate increase before late 2022.
Rehn recommended the Union to focus on financial stability and aim for more credible fiscal rules and better coordination of fiscal policies.
“Europeans deserve better decisions than we were able to take during the euro crisis, But first they need to wake up to see why euro-zone reform is important and how it should be done,” he added.
Mario Draghi's Era approaches its end
The upcoming ECB meeting is the last one of a somewhat controversial tenure. The Italian economist Mario Draghi is finally leaving his post at the end of this month to be replaced by the former Chairman of the International Monetary Fund Christine Lagarde.
Despite bringing in discord on the Bank's governing board and failing to meet the ECB's inflation target, Draghi's tenure will be remembered for saving the Euro.
“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough,” said Draghi in a historic speech five years ago and before announcing a program that brought down bond yields.
Draghi will also be remembered for implementing the controversial Quantitative Easing program in early 2015, in a way that at the time the Bank put the program on stand-by they acquired about €2.6 trillion of bonds, favoring economic growth and employment figures. He also has stated on multiple occasions that the European Union should move towards a Fiscal Union.
It's highly unlikely that the ECB's position will change significatively after the end of Draghi's mandate. Lagarde will now have to deal with a divided governing board, as some of its members consider that Draghi's stimulus measures are risky.
"It is good that there are different opinions," said Lagarde last month, "If it was unanimity, consensus, there would be none of that debate which is so necessary and productive," she added.
By 8:24 GMT the Euro went down by 0.12 percent against the US dollar, falling to the 1.1135 level. It gained 0.09 percent against the Sterling, at 0.8609. Conversely, it gained 0.16 percent against the Swiss Franc, at 1.1007.