ECB's Rehn Says Rising Bond Yields Could Dampen Inflation

European Central Bank (ECB) policymaker Olli Rehn highlighted that rapid energy inflation in the euro zone has not yet spread significantly to other goods and services. He noted that the recent rise in bond yields is likely to slow growth and reduce the pass-through of energy price increases to other prices and wages. Rehn's comments align with those of ECB chief economist Philip Lane, who has also emphasized this dynamic.

Rehn acknowledged that euro zone inflation is well above the ECB’s 2% target, but he cautioned that opposing economic forces are at play. While some policymakers, like ECB board member Isabel Schnabel, have warned that surging borrowing costs could dampen medium-term inflationary pressures, Rehn avoided advocating for specific policy steps. Instead, he adhered to the ECB’s recent stance of not signaling moves ahead of decisions.

Financial markets anticipate two to three more rate hikes from the ECB, with an 80% chance of a move by December. Rehn also recognized the resilience of the economy, partly driven by strong investment in artificial intelligence. This resilience, some policymakers argue, suggests more persistent price pressures than previously anticipated.

Yields have reached decade-high levels across the bloc, partly due to rising U.S. yields and concerns over debt sustainability in Europe. Despite these challenges, Rehn emphasized the high energy prices and the economy's unexpected strength.