ECB’s Wunsch: QT and Interest Rates Going in Different Directions Not Necessarily a Problem
22 March 2023
By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Pierre Wunsch on Wednesday said that quantitative tightening and interest rate policy could conceivably work at cross-purposes without any issue.
Speaking on a panel during the conference The ECB and its Watchers, Wunsch, who heads the Belgian National Bank, said that ‘two instruments potentially going into different directions’ was not ‘necessarily an issue.’
‘What you need to look at is the net impact of what you do’, he said. The ECB can ‘decide to put more emphasis on the one or the other, and I don't see that really is a big problem’, he said.
There was no intention on the part of anyone on the Governing Council to ‘break anything’ by moving too fast with monetary policy, he said.
It was however important to be clear that the resilience of Europe’s banking sector did not mean that there couldn’t be a problem anywhere in it, he said.
‘I would not exclude that there is a problem with one bank or one financial situation somewhere’, he said. ‘I mean, there are many, many banks and financial institutions, we've been hiking fast, the likelihood … that someone made a mistake somewhere is actually quite high.’
Still, authorities had been ‘torturing the data’ and reached the conclusion that ‘[e]ven if banks would have to sell all of their obligations and take the losses’, they would still manage, he said. ‘So, we are in a very different situation.’
According to Wunsch, ‘the big picture’ remained that monetary policy and fiscal policy were ‘going in opposite directions.’ The ‘easy answer’ to the question of how to resolve this conflict was that fiscal policy would ideally return to ‘fiscal consolidation mode, especially in high-deficit, high-debt countries’, he said.
Wunsch considered cases involving an asymmetrical reaction function for fiscal policy, including one in which policy was procyclical but nevertheless adhered to the intertemporal budget constraint, and the case of ‘more severe fiscal recklessness’ in which fiscal policy was ultimately unsustainable in at least some countries.
The first case implied a possible need for more monetary tightening versus that which would be sufficient if fiscal policy were anticyclical, whilst the second could lead to a ‘game of chicken’ in which monetary policy seeks to avoid fiscal dominance, he said.