MNI INTERVIEW: ECB's Wunsch Sees At Least Two Cuts By December
The Belgian central bank governor emphasizes the importance of managing expectations on the pacing of easing.
The European Central Bank will likely cut interest rates at least twice this year, but it is important to manage market expectations regarding the pace of further easing when faced with upside risks including higher inflation in the U.S., Belgium’s central bank chief Pierre Wunsch told MNI on Saturday.
Wunsch, one of the more hawkish members of the ECB’s governing council, signaled a strong commitment to begin lowering rates in June, adding he was comfortable with current market expectations for easing.
"It’s time to remove some of restriction, but in a cautious way. I’ve said the first two cuts will be easy, in the sense that I expect at least two cuts in 2024. But there’s a signaling question -- if we do them quickly, the markets will believe we’ll cut every meeting," he said on the sidelines of the International Monetary Fund and World Bank spring meetings.
"We would need very bad news not to cut in June. I don’t want to take any commitment for July, because if we cut again in July, the market will interpret that as they’ll cut every six weeks, and that’s far from here at this stage." (See MNI ECB WATCH: On Course For June Cut, Still Data-Dependent)
UPSIDE RISKS
Eurozone inflation fell to a lower-than-expected 2.4% in March, welcome news for the ECB and bolstering the argument for lowering nominal rates to keep real rates from becoming more restrictive and further weaken already-stagnating eurozone growth, Wunsch said.
"For the past six to nine months, our models have been performing quite good and even a bit below where we thought we would be." But with services inflation at 4% and wages running just below 5%, "it’ll take time before we really can be sure wage developments and services inflation are in line with our target."
Higher oil prices and the prospect of the Federal Reserve leaving U.S. rates higher for longer in response to firmer U.S. inflation this year constitute upside risks on top of sticky services inflation, he said.
"The U.S. economy has been performing much better than thought. Directionally it would leave a positive impact on inflation in the Europe," he said. "There’s some correlation for goods prices worldwide, and the exchange rate will impact inflation. It's not a huge impact but it's part of the story and we will need to monitor that."
"Our economies’ GDP growth have disconnected substantially over the last year. Europe is stagnating, while the U.S. is doing better than forecast. At some point that has an impact on monetary policy," he said.
If the Fed must turn around and nudge rates higher again, "it makes our job more difficult," he said. "Whether it’s going to derail inflation going back to 2% in Europe will depend on other factors -- wage inflation and productivity growth developments in Europe." (See MNI SOURCES: ECB Wary Of Any "Significant Divergence" With Fed)
REASONABLE MARKET EXPECTATIONS
The ECB will need to see profit margins and wages heading lower to land inflation at 2%, thus the easing path will depend on a slew of factors in addition to inflation readings, Wunsch said.
"It doesn’t allow for a simple rule," he said. "We update our inflation forecast, and if we are still on the right path, it allows for more rate cuts. The timing of the rate cuts will depend on incoming data and the basis on which we get that comfort."
The market reaction so far already indicates "our communications have been quite successful," he said. Markets are currently pricing in three cuts for the year. "I was uncomfortable when markets were expecting more than 100 bps of cuts this year. Now I’m not uncomfortable, give or take 25 basis points."
The growth outlook has brightened and productivity gains should follow, he said. "Inflation going down, growth picking up -- that’s a relatively favorable scenario."