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MNI INTERVIEW: ECB 'May Have To Do A Little Bit More' - Wunsch
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A lasting ceasefire in the Persian Gulf pushing oil and gas prices lower may shield the eurozone from significant second-round inflation effects, but some impact is inevitable and the European Central Bank may have to hike again, Belgian National Bank Governor Pierre Wunsch told MNI.
"We may have the shock disappearing before materialisation of any significant second round effects, but we are going to have some, so maybe we have to do a little bit more," Wunsch said in an interview at the ECB Forum in Sintra.
Speaking ahead of the publication on Wednesday of preliminary June data showing a decline in euro area annual inflation to 2.8%, Wunsch said "the July [inflation] number is probably going to be good on the low side, a downside surprise, and you don't want to hike on a downside surprise."
"But in September we're going to have a new projection, and some more visibility on the second-round effects," he noted. (See MNI INTERVIEW: September Hike Not Guaranteed - ECB's Demarco)
DON'T HESITATE
If the ECB needs to hike, it should not hesitate to act when the time comes, Wunsch said.
The question now is, and this is where I might differ a little bit from my colleagues, is if we need -- and I'm not saying that we need one -- but if we need another hike, I wouldn't wait too long," he said.
"I'm not pleading for a hike, I'm just saying if, if we see enough second-round effects that we believe we should be doing more, then don't wait too long,” Wunsch said. “We know inflation is going to be above target for a while. If we feel we need another hike, if the data tells us and data analysis and models say that we need the second hike, I would not hesitate too much." (See MNI INTERVIEW: ECB Ready To Hike Or Change Course - Kocher)
ROBUST MOVE
Wunsch did not think the ECB's June hike could possibly come to be seen as a serious policy mistake whatever the inflation outcome, but as a robust move, consistent with the data.
"We have to accept that we live in an uncertain world, and that we're going to take decisions sometimes not knowing what's going to happen the next day. But I think inflation is going to be above 2% for a while, so if you tell me that was a mistake ...." he said.
"We don't know when we are going to be at an inflection point, so that's when you can make a small mistake, but it would only be a small mistake. Real rates are going down, so I don't think there is any argument saying it was a mistake."
GUIDANCE
Referring to President Christine Lagarde's speech indicating that the ECB was moving away from “complex” forward guidance, Wunsch agreed that the Governing Council's ongoing data-dependent, meeting-by-meeting approach was correct.
However, he added that at times there would be room for guidance of some sort.
"We are not going to copy and paste meeting-by-meeting, data dependent for the next five years. At some point, it won't mean anything. Sometimes we can allow ourselves to give some kind of guidance, for example, I said in March ‘I guess if this conflict is not done by June, we're going to have to hike,’” he said. "I would not exclude that you need to give a signal, it might be a conditional one, a very cautious one, like if this unfolds, then we might have to do this.”
Jul-01 15:02
The bigger-than-expected drop in energy prices and encouraging data including a fall in core inflation mean there is no reason for the European Central Bank to rush into any further interest rate increase, Bank of Malta Governor Alexander Demarco told MNI, adding that a hike in September is not guaranteed.
“If both the data which is coming out and the new projections in September continue to show that the baseline or milder scenario still holds, we could have a reason to hike again. But if the actual data shows that things are better than what we expected of indirect effects on inflation, maybe there is no need for another rate hike in the end,” he said in an interview on the sidelines of the ECB Forum in Sintra.
“I think time is a bit in our side in the absence of any dramatic developments,” he added, though he noted that even the ECB’s milder scenario, which now seems to be materialising, implied another rate hike.
“The question is now the timing, because I think, given that oil prices have gone down so much, we have to see what the data will tell us.”
Oil prices are now lower than the projections in the milder scenario, though futures prices are still between the mild and baseline scenarios, said Demarco, adding that while cheaper energy could have positive implications for short-term inflation expectations, the U.S.-Iran ceasefire is fragile and uncertainty persists. (See MNI INTERVIEW: ECB Ready To Hike Or Change Course - Kocher)
MILDER SCENARIO DISCUSSION
Demarco admitted that he had initially shared reservations with some other Governing Council members regarding the inclusion of the mild scenario in the ECB’s June projections.
“I thought, at that time … the milder scenario was not very likely to happen,” he said, noting that prospects for rapid agreement between the U.S. and Iran had appeared remote during the June meeting. However, he added, “I saw the rationale also for including the milder scenario because … even though it may have seemed less probable to occur … it would confirm the need for the rate hike in June … So from that perspective, I went along with the decision and I think it was a good decision to include the mild scenario.”
CORE INFLATION KEY
For Demarco, the most important signal in recent inflation releases came from the fall in the core gauge, which he took as a sign that higher energy costs are not feeding through broadly into the economy more than expected.
“Core inflation, even though we do not target core inflation per se, is a very good indicator where inflation is heading,” he said, noting that headline readings can be distorted by temporary movements in energy prices due to tax measures.
“You could have oil prices falling sharply, and that will be definitely a strong negative effect on overall HICP. But if you have core inflation rising, and maybe the drop in energy prices temporarily offsetting that, you could think that inflation has gone down. But the dynamics would be still worrying in that respect,” he said.
“Core can be the change of dynamic to see, like, things are starting to improve.”
AI, R* AND EXCHANGE RATE
The ECB has slightly raised its estimate of the neutral rate, but Demarco was cautious as to any suggestion that this might reflect productivity gains linked to artificial intelligence.
“I'm not too sure that it's really AI pushing up this,” he said, arguing that cyclical factors linked to the energy shock and higher defence spending may be playing a bigger role. Policymakers should wait until the effects of the latest shock dissipate before drawing conclusions about the long-term implications for monetary policy and the neutral rate, he added.
Demarco said recent euro weakness against the dollar was largely irrelevant from a monetary policy perspective. A move from around USD1.16 to USD1.14 was “not a dramatic effect,” he said, attributing most of the adjustment to changing expectations around Federal Reserve policy rather than any deterioration in the euro area outlook.
Jul-01 14:21
Policymakers should remain alert to financial stability risks posed by artificial intelligence, but must avoid designing regulatory frameworks that focus exclusively on downside scenarios and end up stifling productivity gains, IMF Monetary and Capital Markets Director Tobias Adrian told MNI.
“Certainly the policy has to be concerned with the downside risks, but also has to provide room for the opportunities to realise," Adrian said in an interview on the sidelines of the European Central Bank Forum in Sintra.
As financial authorities around the world grapple with the rapid deployment of AI in lending, trading and risk management, the challenge is to strike the right balance between supervision and innovation, he said.
While concerns have emerged that AI-driven trading models could amplify market volatility or reinforce herding behaviour during periods of stress, Adrian noted that financial markets have long been vulnerable to similar dynamics driven by human decision-making.
"Humans have proven to be susceptible to herd behaviour, to panicking in certain moments, and to have behavioural biases," he said.
The key issue is not artificial intelligence itself but how it is deployed and governed, Adrian argued. While poorly-designed systems could amplify market stress, AI could also improve market efficiency and accelerate the incorporation of information into asset prices.
"You could use this artificial intelligence for contrarian investment strategies and to enhance market efficiency," he said. (See MNI INTERVIEW: Gains From AI Productivity Boost To Vary Widely)
AI AND PRODUCTIVITY
While evidence that AI boosts productivity at the company level is already strong, Adrian said it remains unclear how quickly those gains will translate into aggregate numbers.
"What we see in artificial intelligence for the moment is that at the microeconomic level, there's very good evidence that productivity is going up," he said. "But we haven't seen that translate into higher aggregate productivity growth yet."
The timing of that transition could have important implications for bond markets as rising long-term yields across major advanced economies can be interpreted either as a sign of stronger future growth driven by technological advances or as evidence of growing concerns over fiscal sustainability.
"The optimistic view is that this is about AI. This is signalling higher growth in the future, the pessimistic view is that that is about fiscal policy globally,” he noted. (See MNI INTERVIEW: AI Boom Doesn't Justify Lower Rates - Haskel)
REGULATION, LEVERAGE AND GLOBAL COORDINATION
On broader financial stability risks, Adrian said regulators are increasingly focused on leverage and liquidity vulnerabilities in non-bank financial institutions, including hedge funds, private equity firms and private credit funds.
Despite calls in some jurisdictions for lighter banking rules, Adrian argued that resilience should remain the foundation of regulatory reform. While some elements of the post-crisis framework could be simplified, overall capital levels should not be weakened.
"You can make it easier for businesses to understand how to navigate the regulatory environment without compromising on overall resilience," he said.
Adrian also rejected concerns that growing geopolitical fragmentation is undermining international crisis-management capacity, arguing that institutions such as the IMF and the Bank for International Settlements have become even more valuable as channels for information-sharing and policy coordination and that they continue to work well under current circumstances.
"The exchange of information, the sharing of information is even more important today in the more fragmented world than it was in the world that was more united," he said.
"I think that institutions such as the IMF or the Bank for International Settlements... are extremely important institutions, and they continue to work very well as platforms for convening policymakers and for exchanging views."
Jul-01 09:53
The strengthening of the People’s Bank of China’s control of short‑term rates will help curb funding volatility arising from increased government bond issuance, a prominent Chinese economist told MNI, adding that consolidating the new monetary framework will require reductions in banks’ reserve requirements.
The central bank's shift of policy focus to the overnight rate and its plan to introduce an overnight facility are driven by the fact that overnight fund transactions now account for more than 80% of interbank market turnover, said Sheng Songcheng, Research President of China Chief Economist Forum and senior advisor of CEIBS Lujiazui Institute of International Finance.
This will help reduce funding volatility caused by government bond issuance and trading, which have become key variables affecting interbank liquidity, he said in an interview. (See MNI INTERVIEW: Yuan In Steady Upward Trend - Sheng Songcheng)
This week, the PBOC officially launched the overnight reverse repo facility in its open market operations, with injections of CNY300 billion on Monday and CNY600 billion on Tuesday, though it refrained from disclosing the facility’s interest rate.
The experience of Western countries shows that stablishing a price‑based monetary policy framework centred on interest rates requires relatively low reserve requirements for banks, said Sheng, a former head of the statistics department at the PBOC.
At 6.2% in weighted average terms, China's financial institutions still face high reserve requirements, Sheng said, adding that the central bank could cut these requirements this year, particularly given limited scope to boost the economy with interest rate cuts.
Lowering interest rates reduces savers’ interest income while making little difference to companies’ investment plans, which depend more on potential risks and returns, he noted. Rate cuts would also hit banks already struggling with squeezed interest margins and facing significant deposit outflows. Some CNY65 trillion in resident deposits mature this year, according to Sheng’s estimation based on financial reports by listed banks. There were CNY167 trillion of total household deposits at the end of 2025, and the share of maturing time deposits is about 39%, he said.
BOOST FROM RRR CUTS
Meanwhile, each 0.5‑percentage‑point cut in reserve requirements can supply about CNY1 trillion in liquidity to an economy which Sheng said is undergoing a rocky transition from old to new growth drivers. While exports have shown resilience, growth in investment and consumption slowed significantly in the second quarter, with investment in the traditional real estate and manufacturing sectors a major drag, even as the boost to consumption from trade-in policies has weakened and subsidies for new energy vehicles have been tapered.
Pressure on growth is likely to increase over the rest of the year, Sheng said, though he added that it will be increasingly be driven by new industries, noting that from January to May, investment in intellectual property products grew 9.3% year-on-year.
In order to maintain momentum, authorities urgently need to accelerate implementation of policies aimed at promoting urban renewal, upgrading infrastructure and improving social welfare, he said. China needs to stabilise its property market in a bid to ensure stable employment and increase residents' income in order to restore confidence and unleash domestic demand, he said.(See MNI INTERVIEW2: Chinese Economist Suggests QE To Boost Demand)
LOAN GROWTH
Some commentators have pointed to low loan growth as indicative of broader weakness, but Sheng pointed out that much of this reflects a shift in corporate financing from bank credit to the bond market. Bond and equity financing together accounted for 47% of aggregate financing to the real economy in 2025, exceeding loans, at 45%, for the first time, noted Sheng, who led the introduction of the AFRE metric when he worked at the PBOC.
AFRE data also show that incremental financing in China's central and western regions has been on the rise, while their share of national GDP has increased, indicating that financial resources are tilting towards the regions, Sheng said.
Jul-01 07:05
The Bank of Japan will give serious consideration to a pre-emptive increase in its 1.0% policy rate by October or earlier after upward revisions to corporate inflation expectations in the June Tankan survey heightened concerns over stronger underlying inflation, MNI understands.
Bank officials are likely to assess at the July 30-31 policy meeting whether the latest data warrant changes to the baseline inflation outlook or the balance of risks, while continuing to evaluate the need for further hikes, following the Board's decision to increase the rate in June.
While the BOJ has no fixed timetable for hikes, officials generally take several months, or about half a year, to assess the impact of previous rate hikes on the economy and financial conditions. Markets have only priced in 21 basis points of tightening by December with a 35% chance of a hike in October.
However, corporate inflation expectations in the Tankan have reinforced the BOJ's concern that underlying inflation could prove stronger than projected, along with developments in private consumption, and could drive stronger underlying inflation amid faster-than-expected cost pass-through. (See MNI POLICY: BOJ To Consider Faster Hikes On Underlying CPI)
TANKAN RESULTS
On average, companies expected the annual consumer inflation rate to be 2.7% one year ahead in June, up from 2.6% in March, and 2.6% three and five years ahead, both 10bp higher and the strongest readings on record, the survey showed.
The diffusion index measuring the share of firms reporting rising prices minus those reporting falling prices among major manufacturers rose to 40 in June from 28 in March, the highest level since April 2022. The index for major non-manufacturers also stood at 40, the highest level since comparable data became available in 1983.
The results illustrate that businesses remain willing to pass on higher labour and material costs to customers, despite sluggish consumption, contributing to an increasing polarisation in consumer spending.
The BOJ said in June that the pass-through of higher crude oil costs in business-to-business transactions has been progressing at a relatively fast pace, raising the possibility that price increases will spread to consumer goods across a broad range of categories. Beyond higher costs, BOJ officials are also concerned that robust economic activity, supported by strong AI-related demand and fiscal stimulus measures, could generate additional upward pressure on underlying inflation and strengthen the case for further hikes.
WEAK YEN
BOJ officials believe broad-based dollar buying, driven by expectations of further Federal Reserve rate hikes and concerns over Japan's fiscal position, has driven recent yen weakness, which has hovered around JPY161 against the dollar and neared JPY163 overnight, pushing up import prices and maintaining pressure on firms to raise selling prices. (See MNI POLICY: Weak Yen Stokes Concern; Govt Clouds Rate Path)
Japanese authorities have few effective tools to change the market's dollar-buying bias unless investors come to expect larger and sustained BOJ rate hikes amid concerns the bank is behind the curve.
Jul-01 05:07
A pair of U.S. Supreme Court rulings Monday on the president's ability to fire officials at independent agencies do not guarantee future Federal Reserve independence and leave Governor Lisa Cook vulnerable to further attempts to remove her, Columbia Law School professor Kathryn Judge told MNI.
"The news is helpful in protecting Federal Reserve independence, but the decisions by no means guarantee ongoing independence, either as a legal matter or as a matter of democratic legitimacy," she said in an interview.
Cook can remain in her job while her case challenging Trump’s attempt to fire her proceeds in district court, the Supreme Court said. That fight will take some time, and the justices left the door open for round two if the Trump administration wants to try again to get rid of Cook, Judge said.
"There's a number of novel legal issues that are at play in the president's effort to fire Lisa Cook," she said. "There's no case law or precedent to look to."
The court's other decision Monday in Trump v. Slaughter, allowing the president to fire officials at other independent agencies for any reason, "makes it all the more challenging by suggesting there are significant constitutional considerations, but also historical considerations that shape how cause should be understood."
The question of whether Trump could fire or demote Fed Chair Kevin Warsh remains unsettled, at a time when inflation is high yet the president is calling for rate cuts, Judge said.
"One of the key issues that does remain open is whether Trump can demote a chair to becoming a pure governor, and there was nothing in today's opinions that resolved those issues, and if anything, the Slaughter case potentially makes it easier for a president to demote a chair."
CHANGING SURROUNDINGS
The Slaughter ruling gave the president sweeping new authority over approximately two dozen multi-member agencies that Congress intended to be independent, and leaves Fed independence on shakier ground than it has been in over 90 years, Judge said.
It wasn't until the court's 1935 decision in Humphrey’s Executor v. United States -- now overturned in Slaughter -- that Congress put in protections for Fed officials in the Banking Act of 1935. Previously, Congress had removed the "for cause" protection that members of the Fed board of governors enjoyed under the Federal Reserve Act because they didn't think it was constitutional.
"The Fed really rose to independence alongside and in tandem with the rise of independent agencies generally," said Judge, who is working on a book about how the Banking Act of 1935 reformed the Federal Reserve System.
"It's important not just as a legal matter, but as a matter of democratic legitimacy, for the public to believe, and for Congress to believe that there is a reason for the Fed to remain independent. The rationale of expertise and long-term decision making that the Fed has traditionally relied on is no longer going to suffice," Judge said.
Champions of Fed independence should emphasize the Fed's unique structure to make a convincing argument, she said.
"It's important to lean in to the distinct characteristics, and in particular the Fed's distinct decentralized structure, and the way that the reserve banks can promote accountability in helping the public to understand why the Fed deserves the special treatment that it seems to be getting." (See: MNI INTERVIEW: Fed Regional Banks Key To Independence - Judge)
REGULATORY POWERS
Whether the exception the court carved out for the Federal Reserve this week extends to monetary policy functions only or shields the central bank more broadly from presidential control remains uncertain, Judge said.
"The Federal Reserve today looks very different than the First or Second Bank of the United States, and in particular it has a whole variety of regulatory responsibilities that are very similar to regular responsibilities being carried out by the Comptroller of the Currency and by the Federal Deposit Insurance Corporation," she said.
"One of the interesting and challenging questions going forward will be how the Federal Reserve Board carries out those powers, consistent with protecting its independence over monetary policy."
Jun-30 15:18
The European Union is likely to water down key legislation intended to boost its industrial capacity in the face of intense Chinese competition, and could even end up including some Chinese production in the Industrial Accelerator Act’s definition of “Made in Europe,” the co-chair of industrial lobby AEGIS Europe told MNI.
“There are so many divergences (between EU countries) that the final version which will be adopted in the end will be a compromise hence likely not strong enough to defend EU manufacturing,” Ines Van Lierde said in an interview.
While the European Commission has hoped to define “Made in Europe” as a minimum 25% contribution, existing free-trade rules are set to dilute any such requirement, Van Lierde said.
“So, as it stands, that will not help. We have also asked that those countries which are contributing to excess capacities do not qualify as ‘Made In,’” she said, adding that the definition could even end up including some Chinese production. (See MNI INTERVIEW: EU Needs 'Credible Threat' Against China)
“China is investing a lot in Europe so that will be 'Made in Europe' but maybe with Chinese funding and even Chinese labour. So that is not going to be a magic solution either.”
In comments after the announcement on Monday of a joint EU-China monitoring mechanism to monitor trade flows and manage frictions between the two sides, Van Lierde was also cautious regarding the idea of pursuing a more structured dialogue with China ahead of any new trade action.
“Dialogue should always be seen as a positive step. However, I am quite doubtful about the results. Why, because we have such divergent interests, starting with Germany with its huge export interests.”
DIVERSIFICATION TOOL
The Industrial Accelerator Act has already attracted threats of Chinese retaliation. Commission President Ursula von der Leyen has also mooted a new instrument requiring companies to diversify their supply chains, but Van Lierde said that this would only add to European companies’ already onerous administrative burden. (See MNI INTERVIEW: EU Should Use Safeguards Against China Imports)
Instead, industry has been lobbying for the EU to deploy its new overcapacity tool, extending the one already announced for steel to other hard-hit sectors, such as chemicals and ceramics, which are now facing a similar existential threat.
“We had really been hoping and expecting something stronger on tackling overcapacity and new forms of Chinese circumvention,” Van Lierde said. “I am not saying diversification is not important but tackling overcapacity and foreign subsidies should be the priority.”
The EU also needs more staff in the Commission’s trade defence services which is currently “completely overwhelmed” by anti-dumping filings from industry, she said.
“It takes ten months for the trade defence staff to even respond to a dumping complaint from industry. A new instrument - are you kidding? Let's have the people we need to properly use the instruments we already have,” said Van Lierde, adding that when in the mid-1990s she worked as an anti-dumping lawyer in Brussels, industry complaints were answered within days.
Jun-30 14:12
The biggest opportunity for euro-denominated stablecoins is not retail payments but reducing the overwhelming dependence of digital markets on the U.S. dollar, the CEO of Euro stablecoin Qivalis told MNI, arguing that European investors and companies are currently forced to take foreign-exchange risk simply to participate in blockchain-based finance.
“Right now, digital asset trading is 99% dominated by the US Dollar. European traders are forced to hold USD stablecoins, taking on massive FX risk just to participate,” Jan-Oliver Sell said in an interview, adding that immediate high-demand volume for Qivalis , which is backed by a consortium that now includes 37 banks across 15 European countries, should come from crypto trading and decentralised finance.
The launch of the regulated, bank-backed euro stablecoin, now expected for the second half of this year once the Dutch central bank provides authorisation, should address a structural weakness in Europe's digital financial infrastructure, Sell said. While euro stablecoins still account for only a tiny fraction of the global market, the environment has changed materially following the implementation of the EU’s Markets in Crypto-Assets regulation.
“The regulatory foundation is now in place. MiCA has created a clear, harmonised framework for e-money tokens across the EU. At the same time, financial activity is shifting to blockchain-based systems at a pace that is hard to ignore, from cross-border corporate payments to digital asset settlement,” he said.
“By plugging Qivalis into centralised and decentralised exchanges through our partner network, we aim to capture that massive, pre-existing pool of euro-native demand that wants to de-dollarise their on-chain trading.” (See MNI INTERVIEW: Euro Stablecoins Or Dollar Colony - Bini Smaghi)
FROM CRYPTO TO CORPORATE TREASURY
While Sell expects digital asset markets to provide initial scale, he sees trading activity primarily as a starting point rather than the end goal. The longer-term objective for the stablecoin is to expand into corporate payments, treasury management and settlement services as more financial activity migrates onto blockchain infrastructure.
“From this base, we expect Qivalis to naturally migrate into the commercial payments perimeter. It will serve as the foundational, programmable rail for our partner banks to build next-generation corporate treasury and cross-border settlement solutions,” he said.
Unlike traditional payment systems, blockchain-based settlement can operate continuously and allow transactions to be executed automatically through smart contracts.
“Because Qivalis will operate 24/7 with near-instantaneous atomic settlement, it could solve the real-world liquidity lockups that corporate treasurers face daily. As this enterprise ecosystem matures, it could unlock fully programmable payments. By utilising smart contracts, our partners can automate complex enterprise cash flows, like escrow releases, supply chain payouts, or multi-party revenue splits,” Sell said.
According to the Qivalis CEO, existing infrastructure such as SEPA Instant and TIPS was not designed for these types of blockchain-native applications.
YIELD NOT THE MAIN BATTLE
Sell rejected suggestions that European stablecoins face a structural disadvantage against potential U.S. competitors operating under the Genius Act, which could eventually allow some issuers to pass yield on to token holders. (See MNI: Digital Euro On Track For Approval By End Of The Year)
“For the institutional use cases we are targeting - settlement, treasury management and cross-border payments - yield is not the primary decision factor. What matters is regulatory certainty, counterparty trust and seamless integration into existing banking infrastructure.”
Jun-30 13:58
The Chicago Business Barometer™, produced with MNI, cooled 6.0 points to 56.7 in June. The Barometer remained in expansionary territory for a second consecutive month.
The fall was driven by declines in New Orders and Production, while rises in Supplier Deliveries, Order Backlogs and Employment provided some offset.
NEW ORDERS PARTIALLY UNWIND MAY BOUNCE
New Orders declined 11.7 points, partially unwinding the strong rise seen in May (which took the index to its highest level since January 2022). New Orders remain in expansion for a second consecutive month.
Production slowed 10.4 points, almost completely reversing May’s increase, but remains expansionary for the sixth straight month.
SUPPLIER DELIVERIES HIGHEST SINCE JUNE 2022
Supplier Deliveries expanded 8.8 points to the highest since June 2022. Respondents noted higher lead times due to the Middle East conflict.
Order Backlogs edged up 2.4 points to the highest since December 2022, remaining above 50 for a second month.
Employment ticked up 1.3 points, back at the level seen in April but remaining in contraction for four straight months.
PRICES PAID REMAIN HIGHEST SINCE 2022
Prices Paid edged up 1.6 points to the highest level since May 2022. Respondents cited higher oil and metal prices as key drivers of rising prices.
Inventories slipped 5.1 points, in contraction after one month above the neutral 50 mark.
The survey ran ran from June 1 to June 16.
Jun-30 13:45
A rate hike at next week's Reserve Bank of New Zealand Monetary Policy Committee meeting is far from certain as policymakers weigh conflicting domestic and global pressures, though they are likely to need to begin raising rates later this year as economic recovery gathers pace, prominent economists told MNI.
The committee will focus on where the economy sits in the cycle and the size of the output gap when it meets on Wednesday, said Michael Reddell, independent commentator and former RBNZ special adviser. While policymakers are beginning to consider when it will be appropriate to tighten policy, he expects them to wait for more inflation data and hold the Official Cash Rate at 2.25% next week.
"I think mostly what you'll see is commentary on oil, a bit on the GDP numbers, and then really a holding action, given that the CPI is still ahead of them," Reddell said, pointing to Q2 inflation results due July 21. "The key consideration is stripping out oil and related effects and seeing where core inflation is. On an optimistic view, core inflation was already heading towards 2% and not showing signs of picking up materially."
Although markets have priced around a 74% chance of a 25 basis-point hike next week, Reddell sees December following the national election as the more likely starting point for tightening.
"If the CPI data showed core inflation had continued trending down, which is not at all implausible given what's happening in the rental market, then you can quite easily get to December," he said.
SWIFTER HIKES
Cameron Bagrie, managing director and chief economist at Bagrie Economics, argued the RBNZ should begin tightening immediately, lifting the OCR by 25bp next week and moving more quickly toward the estimated 3% neutral level.
"When you look at core inflation, it's around 2.5% to 3%, you've got an economy that's turning, and productivity growth is awful," Bagrie said. "You don't have the capacity to absorb much of a pickup in demand before you start running into capacity constraints."
Labour market conditions were already improving and New Zealand's limited supply-side capacity meant even moderate GDP growth would quickly erode spare capacity, he argued. "The phrase I'm using in New Zealand at the moment, is that we're entering a period of 'broccoli and spinach'. Not everybody likes broccoli and spinach, but it tends to be good for you. Let's just get the OCR around neutral and that's a comfortable level to have it when you've got all this uncertainty."
Reddell, however, questioned the wisdom of moving rapidly towards neutral without a clearer estimate of where that level lies. "We don't have an up-to-date read on core inflation," he said. "If the Bank were to move next week, I wouldn't say it's a big mistake. It's just a question of whether it's urgent. I don't see it as urgent given the remaining weakness in the labour market, the rental market and residential construction."
Jun-30 04:24About
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