MNI INTERVIEW: ECB's Wunsch Sees Restriction A While Longer

MNI (WASHINGTON) - The European Central Bank’s September projections justified continuing restrictive monetary policy “for a while, maybe a quarter or two,” National Bank of Belgium Governor Pierre Wunsch told MNI on Saturday.

While eurozone inflation has recently surprised to the downside and PMI has been weak, it is too early to say that inflation is trending sustainably downwards, Wunsch said in an interview on the sidelines of the IMF meetings in Washington.

“If it's not a blip and the curve is really moving down, let’s say that we start the year [with inflation] at 2.25 going to 2%, we will have a discussion and probably decide that we will need to move restriction. Let’s wait for more information,” he said.

ECB officials increasingly expect to ease policy at each of the next several Governing Council meetings, taking the deposit rate towards the upper end of estimations of neutral, Eurosystem sources have told MNI. A cut of another 25 basis points to the deposit rate is widely expected in December, with Wunsch having dismissed talk of a 50bp cut as “premature.” (See MNI SOURCES: ECB Officials See Rate Expectations As Stretched)

October and November inflation readings will be important as they will be incorporated into December projections, Wunsch said, adding that he didn’t want to “put weight in one or the other.”

TEMPORARY DIP BELOW TARGET

Marginal upward revisions to the ECB’s inflation projections in June and September despite a weakening euro area economy implied some inflation persistence, particularly in services and wages, he said, adding that confidence in the projections has been growing.

"More recent data indicate that we could back to our 2% target faster, which is essentially good news", he said.

“The base case is that we are going to decrease interest rates because the base case is that we are going to target”, he said, noting that there was no need for any kind of pre-commitment or stronger forward guidance as the economy would also be exposed to external shocks like that potentially coming from the U.S. elections.

“I believe that at some point we could have a surprise in the upside for growth,” he said, stressing that economists can tend to over-extrapolate economic gloom or optimism.