ECB Wunsch: Expectations of Quick Policy Loosening Increase Risk of More Tightening
20 November 2023
By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Pierre Wunsch on Monday warned that market expectations of policy easing could wind up leading to further tightening.
In an interview with Bloomberg, Wunsch, who heads the National Bank of Belgium, said, ‘Is it a problem if everybody believes we’re going to cut? Then we have a less restrictive monetary policy. And I’m not sure that then it’s going to be restrictive enough. So it increases the risk that you have to correct in the other direction.’
Financial markets’ assumption that the ECB had reached the terminal rate and might not need to stay there for long were ‘relatively optimistic’, he said.
If inflation is too persistent, the ECB’s forecasts and messaging will convey this, he said. If the markets still fail to expect interest rates to remain at peak for a long period, then the ECB would ‘have to use our rate instruments and hike to get where we want to go’, Wunsch was quoted as saying.
Still, neither next month nor in January did he appear to expect any need to increase rates again, given weaker-than-expected inflation data of late.
‘That moves the question to the next uncertainty: are we going to see some inflation resistance at some point at 3% or something like that because of wages?’, he asked. ‘That is something we’re not going to know by December or January.’