Exclusive: ECB’s Wunsch: ‘We Don’t Want to Rock the Boat’; Assume We’ll Be Cautious in Changing PEPP

16 October 2023

By David Barwick – MARRAKECH, Morocco (Econostream) – The European Central Bank is likely to approach with caution any decision to change its approach to the pandemic emergency purchase programme (PEPP), according to ECB Governing Council member Pierre Wunsch.

In an interview on Friday with Econostream (transcript here), Wunsch, who heads the National Bank of Belgium, took a somewhat reserved view of tinkering with the ECB’s minimum reserve requirements.

While clearly more focussed on the potential for inflation to continue persisting than on the likelihood that price pressures would surprise on the downside, he conceded that last month’s 25bp rate hike could under circumstances lead to an earlier rate cut than otherwise.

‘I don’t think there is any need for us to be brutal about any change we would make’ to the PEPP, he said. ‘We were cautious about changing our approach to the APP, and we can be cautious with changes to the PEPP.’

There was ‘some uncertainty’ about the tightening impact to be expected from changing the PEPP, he said.

 ‘We don’t want to rock the boat’, he said. ‘When we stopped APP reinvestment, we did it progressively so that we could see whether at some point we were generating some movements in the market that we didn't like and that could justify corrective action by us. And my assumption would be that we're also going to be cautious about what we do with the PEPP.’

Still, he said, he was not worried about how markets would take a possible change to the PEPP that contradicted the ECB’s forward guidance, which currently promises that maturing securities purchased under the PEPP will be reinvested until at least the end of 2024.

Rather, he explained, monetary policy did not need the reinforcement in the sense of there being ‘something we could not do with interest rates that we instead have to do by using the balance sheet.’

‘From that perspective, it means that we can be cautious in moving, because there is no upside in rushing this, and at the same time, there is an upside in being cautious’, he said. ‘But this doesn't mean that I have the impression that it's very dangerous.’

In any event, it is possible that financial markets have already largely priced in both a sustained period of high interest rates and an end of asset purchases, he said.

‘Of course, sometimes we do something we think has been anticipated and priced in, and yet we still see a reaction, which is also why I think we need to be cautious’, he added.

Though very much in favour of making the PEPP a topic of discussion for the Governing Council sooner rather than later, Wunsch was philosophical about whether the subject would make it onto the agenda at the 26 October monetary policy meeting in Athens.

‘If it's in October, fine; if it's a bit later, I’m fine with that as well’, he said. ‘I don't see it as a pressing issue. I  think of it more as a consistency issue … one of our instruments is out of sync with the rest’. 

Asked how receptive he was to raising the ECB’s minimum reserve requirements, he argued that if the motivation was to reduce the size of the balance sheet, then ‘we have low-hanging fruit, which is reopening the PEPP discussion. Let's start with that. And then I think we need to look at the operational framework.’

Only after that would it make sense to consider the question of ‘whether we need other instruments to accelerate the reduction of the balance sheet’, he indicated.

Profit is not an objective of the ECB, he reminded. ‘We have a mandate, which is price stability, and if this means that we need to take positions that may lead to losses, so be it’, he said.

An increase of the minimum reserve requirements when these are unremunerated is essentially a tax on banks for which depositors ultimately foot the bill, he said.

‘I'm not sure I want to explain in Belgium that we are taxing banks so that they can give even less to depositors because we want to recoup the losses that we made in trying to get inflation back to 2%’, he said. ‘I'm not sure that I want to do that.’

Wunsch left no doubt that the ECB was in no position to declare the September rate hike the final one.

‘Just because we’ve now had three or four inflation readings in line with our projection over a very short-term horizon, it’s not that we suddenly have a huge amount of confidence in the projections two years ahead’, he said. ‘The likelihood that we're going to be faced with some [inflation] resistance around 3% or 3.5% is real, considering wage developments.’

Moreover, as a result of recently higher oil prices, ‘the momentum in headline inflation has gone up again’, he said. ‘It's over 4%, maybe even close to 5% now, depending on the measure you use.’

‘I'm not saying suddenly that core inflation is going in the right direction, so I'm going to look at headline inflation to find an excuse to be hawkish’, he assured. ‘Core developments are going in the right direction. But we are faced with higher oil prices.’

The bottom line, he said, is that ‘if you ask me whether we’ve reached the terminal rate, I’m only going to answer, “Maybe, maybe not.”’

‘Honestly, when I see that the UK, the US and Canada have all paused and then had to hike again, I think the chances that we would have to do the same are far from marginal’, he said.

Although the arguments in favour of a September rate hike prevailed against reasons to pause that were also legitimate, ‘I would not make too much of that’, he said.

‘It’s another 25bp, but if at some point we have the impression that the hike has accelerated the convergence of inflation to target, we might cut earlier, meaning undo the hike’, he said. ‘So, I would certainly not over-dramatize it. We are at a point where it was not obvious anymore that we had to hike, and on balance, we decided to do it.’