MNI INTERVIEW: Vital ECB Returns Inflation To 2% By 2025 - Wunsch

MNI (SINTRA, PORTUGAL) - The European Central Bank would risk de-anchoring price expectations if it were to permit inflation of more than 2% in 2025, said National Bank of Belgium Governor Pierre Wunsch, who wants further hard data confirming a downward trend in wages and inflation before cutting key interest rates below 3.5%.

“Beyond that [2025], there is a risk people believe we tolerate inflation above 2%”, Wunsch told MNI in an interview on Wednesday on the sidelines of the ECB Forum in Sintra. While long-term expectations for prices to rise by 2% show the ECB has maintained its credibility, the Bank cannot rest on its laurels, he said.

“We tend to oversimplify the expectations discussion and confuse what is a necessary condition for a sufficient condition,” he said, adding that by the time inflation expectations de-anchor it is too late and that wage-price spirals can still occur even with anchored expectations.

“The fact that they are anchored is helping? Yes. Because the 5y5y is at 2%, I am confident that we are going to 2%? No,” he said.

Given its forecast for inflation at 2.5% into the autumn, the ECB has room for at least one more 25-basis-point cut in the Deposit Rate from 3.75%, but after that it must be cautious, he said. (See MNI INTERVIEW: ECB Has “Nice Path” To 2% Price Target – Kazaks)

"I'm willing to remove some of the restriction, but beyond that would like to see some real data," Wunsch said. "My take on it for what it’s worth is that we can probably move to 3.5% with inflation at 2.5% and be restrictive.”

GREY AREA

Taking the Deposit Rate to 3.5% would leave real rates at about 1%, with spot inflation expectations well anchored at 1.5%, he said. But, while energy and goods prices are falling, services inflation is still running at 4%, according to June flash data, he noted. (See MNI INTERVIEW: Cut Not Guaranteed In Sept - ECB's Muller)

"Then you get into the grey area. Which means that I am willing, because we have a good track record in the last six to nine months of estimating falling inflation, so I'm willing on the basis of our projection, to cut to 3.5%, he said. "Beyond that I need to see momentum, be it wages, be it inflation moving down, to contemplate more rate cuts.”

Wunsch said the proof of declining inflation could come in wages data, and not necessarily in headline inflation, but that he would "need the momentum of real data to be coming down". 

"Clearly if wages are going down, I am comfortable that inflation would follow -- although it would be better if it were inflation itself," he added.

Wunsch noted that any fresh supply shock over the next six months or year would change calculations, as it would be clear that any resulting price surge would be beyond the control of the central bank. 

 “It wouldn’t kill the economy just because we are not at 2%” in such circumstances, he said. (See MNI INTERVIEW: 'Good Prospects' For Further ECB Cuts - Centeno)

FISCAL POLICY

The eurozone’s fiscal stance should be restrictive in 2025 and 2026, making the ECB’s job easier, said Wunsch. Asked about the fiscal direction of France after its second round of parliamentary elections, he declined to comment on any one country, though he noted that  “there is always the risk that the market doesn't look at some risk and suddenly wakes up and overreacts.”
Overall, markets have been “very gentle” in reacting to fiscal developments, he said, adding that “I am welcoming market attention and some pressure from the market in general.”

U.S. elections also constitute a geopolitical risk, he said, though he added that the impact on Europe of any moves affecting tariffs or the war in Ukraine could take time to become clear.