ECB’s Wunsch: Possible to Start Easing Despite Uncertain Inflation Outlook

8 May 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Governing Council member Pierre Wunsch on Wednesday said that it was possible for the ECB to start reducing interest rates this year even with some uncertainty about the inflation trajectory, as it would be harmful to stay in restrictive territory for too long.

Speaking at the Frankfurt School of Finance and Management, Wunsch, who heads the National Bank of Belgium, said, ‘All in all, and although the outlook remains foggy, I see a path for initiating rate cuts this year.’

The main factors behind that conclusion were the fact that inflation forecasts had become more reliable and that inflation was still projected to reach the target by 2025, he said, adding that ‘with no sign of de-anchoring in the longer term, the costs of remaining tight for too long seem to outweigh those of a premature loosening.’

He reaffirmed his opinion that cutting interest rates in June was a ‘no-brainer’ unless there were unexpected shocks, and said that he would be comfortable affirming that the ECB could cut by a total of 50bp in the coming months.

‘As much as I believe June is close to a done deal, the next one will have to be more cautious’, he said. ‘I think there is room to cut 50bp, but when we do the second cut, I think, for me, it’s going to be essentially about communication with the market.’

The ECB should be ‘prepared to tolerate some flexibility in interpreting the point inflation target of 2.0%’ in order to avoid mistakes, he said.

A data-dependent approach was important when dealing with uncertainty, he said, citing the risks associated with wage growth and inflation in wage-intensive services.

‘Despite recent signs of moderation, more will be known about the dynamics of wages and services inflation at the June Governing Council meeting’, he said.

The potential emergence of a wage-price spiral was another concern when it came to the persistence of inflation, he said. ‘Thus, placing a greater emphasis on short-term inflation expectations and wage dynamics seems advisable in order to navigate the current climate’, he said.

Looking forward, monetary policy should be humbler in order to tolerate ‘some more deviation from our target when economic conditions are benign and when risks of larger deviations are contained’, he said.