To the people in Ireland, Ollie Rehn is most famous – but perhaps not fondly remembered – as an advocate of asceticism.
Rehn, the EU’s top economics official during the euro sovereign debt crisis a decade ago, helped oversee the dreaded troika that imposed harsh budget cuts on “peripheral” Europe, including Ireland.
Now, as governor of the central bank of Finland, Rehn sits on the Governing Council of the European Central Bank, where he is a bellwether.
In an array of interest rate hawks and pigeons, he sits somewhere in the middle with our own Central Bank governor, Gabriel Makhlouf.
But that middle is shifting as inflation in the general currency area is not showing any signs of subsidence.
Now Rehn has joined the chorus of Germanic voices in Frankfurt calling for tighter monetary policy and interest rate hikes starting in July.
In an interview over the weekend, the Finn said he could see an “inflationary trend” in the eurozone economy as the so-called second-order effects of higher prices – such as wage demand – filtered through.
Hence his call for the ECB to lift deposit rates, which have been in negative territory for years, to zero by autumn.
This would be a proposal to raise the refinancing rate in the last quarter of the year, in a move that would have major implications for borrowers, especially those with tracker mortgages.
This is a tricky dance to choreograph.
As recently as January, Philip Lane, the ECB’s chief economist, was still indicating that inflation was likely to be transient and that rate hikes could probably wait until 2023.
But Lane and other doves are attuned to the reality of ever-increasing consumer prices. All signs to council members indicate only one outcome: a rate increase sooner rather than later.
Markets have already begun anticipating an inevitable tightening of ECB monetary policy as the Bank of England and then the Federal Reserve made their move.
For example, the return on a 10-year loan to Ireland is now 1.85 percent. Ireland was borrowing for free less than a year and a half ago.
Perhaps after learning the painful lessons of a crisis-turned-austerity two-stage all those years ago, the National Treasury Management Agency (NTMA) has accumulated massive cash reserves in recent years when borrowing was cheap.
Now the agency is content to calm any potential market turmoil around the ECB’s decision by canceling its scheduled loan auction in June.
With €27.5bn cash on the books, it can afford. Ireland’s booming economy also helps.
But NTMA is telling us something with its choreography too.
Eurozone monetary policy, arguably the savior of the Irish economy at a time when the government has been required to borrow heavily for COVID support measures, is now once again precisely aligned with local economic conditions. After all, when the economy warms up, rates should go up.
There has probably never been a better time for this change as Ireland’s deficit narrows and taxes soar.