By Marta Vilar – SINTRA, Portugal (Econostream) – Arguments supporting additional monetary policy tightening in the euro area are visibly fading, according to European Central Bank Governing Council member Pierre Wunsch.
In an interview with Econostream on Tuesday (transcript here) on the margins of the ECB Forum on Central Banking in Sintra, Portugal, Wunsch, who heads the National Bank of Belgium, said that “the case for a further hike is receding.”
Tensions in the Middle East have eased before meaningful second-round effects had time to emerge, while June inflation figures were likelier to argue against rather than for policy tightening, he said.
“Based on the recent inflation data from Germany, I would assume that if there is a surprise in inflation data by the July meeting, it is more likely to be on the downside,” he said.
Should the shock keep easing before notable second-round effects take hold, a single further rate increase might suffice, he said. He described conditions as closer to the milder scenario, with any additional tightening beyond that point contingent on clearer signs of persistent inflation and stronger second-round inflation dynamics than currently anticipated.
There was “a real possibility” that oil prices could fall below pre-crisis levels, he said, pointing to structural changes such as electrification, greater use of renewables and lower oil consumption.
“My understanding is that most oil production capacity should be restored within a quarter if the conflict does not resume,” he said.
Asked whether second-round effects could become apparent by the September meeting, Wunsch said there was no single decisive data release but that the overall picture in this regard should be much clearer.
“By September we should have a better idea whether meaningful second-round effects are emerging,” he said.
As for what could trigger a July hike, Wunsch said it was difficult to identify a specific catalyst, given the likelihood of a downside Eurozone inflation surprise following recent German and French inflation data. “Perhaps if the conflict were to flare up again,” he said.
The market-implied policy path underpinning the ECB's projections was a “useful reference point” rather than a commitment, he said, noting that policymakers could always “recalibrate” as conditions evolved.
Referring to earlier comments that he would be comfortable reversing policy shortly after tightening, Wunsch said: “If conditions warrant cuts, that is simply part of monetary policy,” adding that policymakers should not avoid changing course if the data justified it.
Asked whether inflation undershooting the ECB's target could become the next major concern, Wunsch said it depended on whether headline or core inflation was falling below target.
“If lower headline inflation is driven by cheaper energy or imports rather than weak demand, the ECB should not overreact, just as it did not overreact to this shock now,” he said.