Wunsch claims there is no pressing need for the ECB to accelerate policy easing

Belgium’s central bank chief, Pierre Wunsch, recently commented that the European Central Bank (ECB) has no immediate need to speed up interest rate cuts and could even accommodate a minor, temporary drop below its inflation target. His statements align with other ECB officials who have been cautious in response to recent calls for more aggressive rate cuts.

Within the ECB, policymakers have recently expressed a range of views regarding inflation and the direction of monetary policy. Some members are concerned about inflation potentially dropping below 2%, suggesting a need for swift action, while others feel risks are more balanced and advocate for a careful approach.

"Employment levels are high, real wages are growing, and a soft economic landing remains the most likely scenario, so there’s no rush to expedite monetary easing," Wunsch said in an interview with Reuters.

These comments come after the head of Portugal's central bank, Mario Centeno, suggested a 50 basis point rate cut could be considered in December, while Italy's Fabio Panetta argued that it may be difficult for the ECB to pause rate cuts once a neutral rate, which neither stimulates nor slows growth, is reached.

Market predictions currently suggest a 35 basis point rate cut on December 12, with a 40% chance the ECB could opt for a larger 50 basis point cut, following three 25 basis point reductions earlier this year.

Wunsch indicated that inflation might reach the ECB’s target by mid-2025, sooner than previously forecasted for late that year, though he saw little risk of inflation falling significantly below 2% over an extended period.

If inflation does decline faster, further rate cuts might be warranted, but Wunsch emphasized that any easing should remain gradual until economic restrictions are fully lifted.

He also noted that the ECB tends to look beyond short-term inflation fluctuations driven by energy price volatility, advocating for a symmetric approach that ignores such volatility in both directions.

"If the economy is stable and operating near its potential but we’re seeing a brief undershoot due to a favorable terms-of-trade shock, I’m comfortable with that, and we shouldn’t overstate its impact," Wunsch said. "A slight dip below 2% isn’t significant if the medium-term outlook points to 2%."

Wunsch also suggested that underlying inflation, which excludes energy costs, could be a better gauge of the ECB’s policy impact, as it provides more insight into wage-driven pressures, particularly within the services sector, which makes up a large portion of consumer spending.

"I’d argue that underlying inflation may give us a clearer picture of policy restrictiveness than the headline rate," he said.

Wunsch urged caution on predicting December’s actions, noting that upcoming events and data releases could heavily influence the ECB’s decision-making.

"There’s a substantial amount of information to come before then, including two more inflation reports and updated staff projections," he said. "We’ll also see the outcome of the U.S. election and monitor the evolving situation in the Middle East, so discussing precise rate decisions now is premature."

 

 

 

 

 

 

 

Paraphrasing text from "Reuters" all rights reserved by the original author.