MNI INTERVIEW: Wunsch Sees ECB Sept Hike Without Slide In Core

The European Central Bank needs to see a fall in core inflation over the next three readings to have a reason to pause its hikes in September, National Bank of Belgium Governor Pierre Wunsch told MNI, adding that while it was not the base case it might be necessary to sacrifice growth to contain prices.

“Maybe we are going to have three readings of core at 5% [either 0.4% on a monthly basis or 5% on an annual basis] on average with the momentum not moving, and then we'll have to do more,” Wunsch said in an interview in the Portuguese town of Sintra where the ECB is holding its annual forum on central banking, though he noted that it was possible that two declines in core inflation could be sufficient to pause if they were big enough.

“Three would be better than two, but [if] it’s like two big ones don’t put me in the corner. We have [to have] a clear indication that it’s going down,” he said.

The ECB has to be on guard against doing too little against inflation, he said, adding that econometric models appeared to structurally underestimate the persistence of core prices and that the eurozone remains at risk from shocks in areas such as energy.

“You never see shocks at the end of the projection but between today and 2025 I bet there will be shocks,” he said.

DOUBT OVER PROJECTIONS

Wunsch also raised questions about the projections of his own national central bank for inflation to fall below 2% in 2025.

“We have a model which is structured on basically external prices, which tends to go down to where average core was, which was 1.5%. So I would not read too much, and actually I've asked my people from now on, for the end of the period, to put a question mark on our numbers,” he said.

The eurozone might have to “see growth going down” if core inflation remains stubbornly high and labour markets tight, he said, stressing the importance of wages data.

ECB projections pointing to a soft landing with inflation returning to 2% as wages catch up to 2019 levels in real terms would require firms to reduce profit margins, he said.

The ECB should also maybe at some point discuss “accelerating the exit” from reinvestments of bonds aquired under its Pandemic Emergency Purchase Programme, Wunsch said, adding: “I am checking every week if we still have people having Covid.”

But, asked if the ECB should start active quantitative tightening by selling securities from its Asset Purchase Programme, he said that interest rates are the central bank’s main tool even if the balance sheet is too elevated.

“We are going to have discussion on the way forward in terms of our operational framework, whether it's going to be demand-based, supply-based, or whatever. We are going to have the discussion,” he said, noting the importance of flexibility.

The ECB should be able to provide liquidity quickly if there are economic shocks, but beyond that “the more we can allow for price discovery in the market without having too much of a footprint in the markets, for me, the better,” he said.