ECB’s Wunsch: Our Baseline Scenario Suggests We Still Have a Long Way To Go

20 March 2023

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Pierre Wunsch over the weekend said that the ECB’s macroeconomic projections implied that the hiking cycle was far from over and that banking sector turmoil would probably not stand in the way of further tightening by impacting financial markets.

In an interview with Belgian business daily l’Echo and its Flemish counterpart De Tijd, Wunsch, who heads the Belgian National Bank, confirmed that there would no longer be ‘any indication of the future level of rates.’ 

‘We know we need to do more’, he said. ‘To what extent? It's not clear. It will be meeting by meeting. If we match the baseline scenario of our projections, we still have a long way to go. So, based on our predictions alone, this is not the end of the story.’

It remained to be seen whether those predictions would materialise, he said, suggesting that this would be apparent ‘in the next few days’ with further developments in the banking system.

‘The base scenario is that the situation will stabilize and have no impact on the financial markets’, he said. ‘Another possibility is that banks are becoming more cautious and demanding in granting credit.’

Describing last Thursday’s Governing Council meeting, Wunsch said that despite the ‘much higher’ uncertainty, a ‘large majority’ favoured hiking rates because ‘inflation remains too high for too long’ and because ‘we do not see a structural problem in European banks.’

‘If we had made another decision, I think we would have contributed to the uncertainty because people would have worried’, he said. ‘So, in the end, it was a relatively easy decision to make.’

One had to differentiate between Europe, ‘where banks are subject to certain rules’, and the US, he said, calling Credit Suisse ‘a special case.’ In Europe, ‘it is very difficult to find a case that is comparable to Silicon Valley Bank or other banks in difficulty’, he said.

It was ‘very difficult to imagine the return of a financial crisis’, even if ‘[w]e can never exclude that here or there, a problem arises with a small, badly managed bank in Europe’, he said. ‘However, there is no signal in this direction. We don't see any risk of contagion or risk of instability, if we look at the numbers from a rational perspective. If we analyze the financial system as a whole and the European banks, the situation cannot be compared to that of the American regional banks.’