Market Expectations of ECB Rate Hike Path Reasonable, Wunsch Says

13 April 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – European Central Bank Governing Council member Pierre Wunsch said on Thursday that market expectations of a further 75bp of ECB tightening were reasonable, and laid out the conditions which might lead to the ECB hiking by 50bp in May.

In an interview with Reuters at the IMF and World Bank spring meetings in Washington, D.C., Wunsch, who heads the National Bank of Belgium, called for a faster reduction of the ECB's balance sheet and suggested halting reinvestments from debt maturing in its largest bond buying scheme to complement further interest rate hikes.

He said that the ECB needed to keep raising interest rates and that the market's expectation of another 75bp of increases was ‘reasonable’, but that expectations of a rate cut around the turn of the year were not.

‘I think May will be about 25 or 50bp […] if there's another upside surprise in core inflation and the lending survey doesn't look too bad, we might have to do 50bp’ he said. ‘If there is a positive surprise in core, then perhaps 25bp is more appropriate.’

‘We need to do more on quantitative tightening’, he said, suggesting that ‘we could do a full stop of reinvestments this year and even with that, it will take years to run down the portfolio.’

In his view, the ECB’s balance sheet was ‘still too big’.

Core inflation numbers were a particular cause of concern for Wunsch, who said that ‘what is really concerning is that in December we projected core inflation stabilizing at 5% before its decline […] we’re now at 5.7%, and within a few months the deviation from that December projection could be 1 percentage point.’

‘There is a risk [that core inflation] could hold above 3% for a longer period’, he said.

He added that ‘given that wage dynamics will be incompatible with the 2% inflation target for years and real rates are still low, I don't see any quick reversal of policy once we reach the terminal rate.’