ECB’s Wunsch: Not Comfortable with Length of Commitment of New Forward Guidance

23 July 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Pierre Wunsch said Friday that his opposition to the ECB’s new forward guidance reflected his uneasiness about a commitment of the duration the guidance could imply.

In an interview with CNBC, Wunsch, who heads the National Bank of Belgium, said that all members of the Governing Council ‘agree we want to be supportive in this phase of the recovery, we all actually want to go to 2%, so my dissent shouldn’t be dramatized.’

Wunsch and Bundesbank President Jens Weidmann were the lone holdouts to oppose the new forward guidance agreed by the Governing Council on Thursday.

‘I guess it boils down to the kind of commitment you can take over a possibly long period of time’, he continued. ‘We are maybe talking about five, six years if we look at market expectations before we would hike, and I didn’t feel comfortable taking a commitment for such a long period, because … we might be faced with trade-offs that are a bit more difficult than we’ve been faced in the past.’

‘To me the most important conclusion of the [strategy review] retreat actually, and our new strategy, is what I would call a “no regrets” conclusion, is that we all agree that what we have been doing in the last few years was necessary and proportional’, Wunsch said.

‘The question is whether this proportionality test that we are going to have to make in the future — whether we can remain proportional in what we do and take commitments over a long period of time, like five or six years in the future.’

Fiscal or financial dominance could become an issue at some point, justifying uneasiness with the new guidance, he said.

‘Maybe I’m just taking forward guidance too seriously’, he said, ‘because some of my colleagues, when I would ask them so what do we do if this or that occurs, they would say, “Oh, then we change forward guidance”, so maybe I’m just taking forward guidance too seriously.’

Asked to explain why he considered the potential period of time to extend to as much as six years, Wunsch cited market expectations, but also observed that the low level of 2023 HICP projected by the Eurosystem meant that ‘it would take some time on the basis of our last forecast to get any closer to 2%’, so that one could ‘easily be in a situation where you have to wait five or six years’.

Still, risks have become more balanced and the US experience suggests higher European inflation ‘might come sooner and more strongly than expected’, he said. This would actually be ‘very good’, he said, being monetary authorities’ goal, but leads to the questions of how to address possible overshooting and how to handle a possible subsequent decline of inflation back below price stability.

The latter situation – that we get stuck somewhere in between 1% or 2%  - cannot be excluded, he said, ‘and then maybe at some point we have to ask ourselves whether our tools are leading to where we want to go.’

What would constitute a ‘transitory’ period of overshooting would be situation-dependent, he made clear. ‘I’m relatively relaxed with having some overshooting for certainly above two months, for a period that would be longer than that, but it depends on what your assessment is of whether … this overshoot might be sustained and leading to something that we might not have under control.’

Given the uncertainty about what will happen with inflation, the flexibility of an ‘escape clause’ would have made the forward guidance palatable to him, Wunsch suggested. ‘I would much have preferred to have an escape clause so that we would make it very clear that if we would be faced for instance with difficult trade-offs, that we would exit sooner.’