ECB’s Wunsch: Market View That Real Rates Will Have to Approach Zero Might Be Optimistic
8 November 2022
By David Barwick – GENEVA (Econostream) – European Central Bank Governing Council member Pierre Wunsch on Tuesday said that the view of financial markets that real interest rates would have to approach zero could prove optimistic.
In a lecture at the Geneva Graduate Institute, Wunsch, who heads the Belgian National Bank, said that monetary authorities would have to do ‘maybe even more than what is priced by markets’.
‘The markets’ consensus … is now that real rates will have to go to close to zero’, he said. ‘But honestly, it might still be optimistic. If we don’t see second-round effects, if we still have wage moderation in Europe, it’s a possibility. But I think it could easily be higher than that.’
‘We know that policy rates may have to be raised more decisively than what any model in our toolkit would suggest’, he said.
Although Wunsch said that his own ‘base case is a technical recession’, it was ‘reasonable to believe that it might not be a very deep recession’, also because of the positive growth impact of fiscal support.
He advocated prudence with respect to quantitative tightening.
‘Honestly, there is no reason why we should keep buying sovereign bonds, but at the same time we don’t have a lot of information of what it would mean to stop QE, and I would be for [being] cautious there’, he said.
QT should ‘start early and cautiously’, with an assessment shortly into the exercise of whether ‘there’s enough absorption capacity in the market’ before picking up the pace, he said.
Wunsch urged vigilance on inflation, saying there was ‘a tangible risk of de-anchoring of inflation expectations’ and that ‘inflation remains stubbornly high and is testing expectations’.
Expectations have remained ‘broadly’ anchored, he said, but posed the rhetorical question, ‘Are we comfortable with that? … I’m a bit afraid that by the time they get de-anchored, it will be too late.’
Consumer expectations had increased significantly, he observed, adding that ‘there is something taking place there’ that needs monitoring. Real wages had declined in Europe by some 5% to 6%, he said, and production costs were apt to ‘be on a rising trend for some time.’
‘I really believe that any further increase of inflation … will have a higher pass-through to wages in the coming years’, he said. ‘I think we are going to see a new normal of wage developments … around 4, 5, 6%. And I think this is going to last a little bit.’