Exclusive: ECB’s Wunsch: Likelihood of 50BP Rate Cut in December ‘Very Low’

11 November 2024

By David Barwick – FRANKFURT (Econostream) – The European Central Bank is unlikely to cut interest rates by 50bp in December, according to Governing Council member Pierre Wunsch.

In a recent interview with Econostream, Wunsch, who heads the Belgian National Bank, made clear that the Council’s data-dependent decision would reflect whether recent inflation data were a passing outlier or had changed the baseline.

‘My expectation is that the likelihood of a 50bp cut in December is very low’, he said. Still, it depended on whether the information that had motivated the October cut truly constituted ‘a shift relative to the projection’.

‘If what we've seen is indeed shifting the inflation curve, then we’re probably closer to 2.25%, with inflation presumably still going down given economic weakness’, he said. ‘And if we start out next year at 2.25%, with inflation falling, then we need to remove restriction.’

‘But maybe what we’ve seen regarding inflation is just a blip, and we’ll project 2.4% or even 2.5% at the beginning of 2025, as in June and September’, he continued. ‘If this materialises, then we may still need some level of restriction and could theoretically decide not to cut in December.’

To gain sufficient confidence one way or another, November inflation data as well as updated macroeconomic projections were essential, he said.

In any case, October’s cut should not be seen as a December cut brought forward, he said.

‘I don't see it that way’, he said. ‘For me, December is completely open. And again, either the September inflation number was a blip, in which case we might not cut in December, or we confirm a shift, in which case cutting in December is quite likely.’

Significant undershooting in terms of domestic inflation was a ‘very remote’ risk, Wunsch said, while the rest of what was driving euro area inflation was mainly a ‘positive terms-of-trade shock.’

To be sure, December’s initial 2027 projection would likely show inflation below 2%, given the models’ tendency to understate the year at the horizon, he said. If so, then despite the low value of the year +2 forecast, some people would see a risk of undershooting, he said.

Most Council members however agreed that things were ‘moving in the right direction’ in terms of price stability, Wunsch said. Similarly, there was broad agreement that although a cautious approach was warranted, risks were more balanced, he said.

‘Risks may even be tilted to the downside on inflation, and the likelihood that we remove restriction based on the new forecast in December is significant’, he said.

With the new macroeconomic projections, there was a ‘fair chance’ that the Council would conclude in December that it could start to remove restriction, he said. However, this did not imply picking up the pace, he emphasised.

‘In this case, the wording on restriction would disappear’, he said. ‘But I don't think we’ll jump to the conclusion that we’re behind the curve and need to accelerate.’

As to economic prospects, Wunsch was guardedly optimistic. The implications of Donald Trump’s US presidential election win were very uncertain, but Trump could significantly hike oil output over the medium term, driving down energy prices, he said.

The ECB envisioned an economic recovery, he said. ‘We still have a relatively strong labour market with a structural shortage of labour and only a limited likelihood of a sudden increase in unemployment’, he argued.

‘The base case of the projection - unless we believe that we are going the way of Italy over the last decade and there's no growth for the next 10 years - remains that at some point, with wages going up, we will have a recovery’, he added.

Additional comments by Wunsch included the following:

December: ‘If the projection were to be downgraded, with inflation returning to 2% around mid-2025, then we need to remove restriction. In that scenario, we must decide what it means to remove restriction.’

Wage catch-up: ‘Now wages are going back to the 2019 level, but in 2025. So, you're a worker in 2025 and your real wages have been stagnating for six years. If there’s a recovery and workers feel more secure about their jobs, then I can easily see them saying, “Let's have another round at 4%.”’

Whether the 2027 projection should drive today’s policy stance: ‘That's the discussion about the quality of the year +2 projection (which is very limited and very model-dependent), and the tolerance for small deviation, at least in the forecast but also in reality. And what kind of terms-of-trade shock - positive or negative – do we see in ’27? We have no clue. Also, domestic inflation is still high and won’t fall to 2% quickly. So, the question is, what's imported inflation going to be? And then it becomes, trade war or no trade war? Tariffs or no tariffs? Many questions, but we have no answers today.’

How inflation was seen last month: ‘We didn't make a call in October in terms of where the curve was. We didn't have a projection exercise and had only one spot reading deviating from our previous projection. So, we decided not to make that call. We always have a mechanical update, but a mechanical update is only a mechanical update. You don't learn so much from that.’