ECB Wunsch: ‘We May Have Reached the Peak, but I Would Say We Are Far From Sure’

20 September 2023

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Pierre Wunsch has said that high uncertainty made it very unclear whether the ECB’s rate hike last week would be the final one in the current tightening cycle.

In an interview with Belgian business daily l’Echo published late last Thursday but evidently unnoticed in the cacophony of policymaker comments following that day’s Governing Council meeting and in the context of the Informal Ecofin over the weekend, Wunsch, who heads the National Bank of Belgium, said that ‘uncertainty remains too high to be able to announce that this is the last rate increase.’

‘If we no longer have to increase rates, so much the better’, he said. ‘We are at 4% and I do not exclude that it is sufficient, but we have seen in Canada, the United States and elsewhere, that pauses were sometimes followed by a new period of increases because the uncertainty is very large. So, we may have reached the peak, but I would say we are far from sure.’

Still, there would probably not be any rate hike in October, he conceded, the ECB being ‘clearly in a phase where we can afford to wait a little to see what developments in inflation will be in the coming months.’

Ultimately, wage developments would play a big role in future decisions, though the extent of the economic slowdown and the rebound in oil prices were also important factors, he indicated.

‘The uncertainty therefore remains high and prevents us from concluding, today, that we have reached the "terminal rate"’, he said. ‘On the other hand, I am personally entirely in favour of us now giving ourselves a little time and waiting until we have, perhaps, two or three inflation figures before possibly considering an additional increase.’

According to l’Echo, Wunsch drew attention to the absence ‘[f]or the first time in a long time’ of ‘a big gap in our underlying inflation forecasts’, which he interpreted to mean that ‘from now on we can use, more than in the past, the forecast of the trajectory of inflation by 2025 as a reference point.’

Should inflation weaken in line with the projections in the coming months, ‘it will mean that we will probably not have to do anything more’, Wunsch said. ‘If inflation were to fall less quickly than expected, then I think we will have to have a new discussion to see if we should not do more, because that would then bring us to a return to 2% which would be very far in the future.’

Wunsch observed that ‘if the markets themselves expect rates to remain high for longer, that contributes to the fact that we could possibly do less in terms of levels.’

As for the ECB’s balance sheet, ‘a fairly large number of my colleagues believe, like me, that at some point we should have this discussion again to see if we really want to reinvest until 2024’, he said. ‘Is this very urgent? No. But I believe we will do it in due time.’