MNI INTERVIEW: ECB's Wunsch Sees Downside Growth, Price Risks

Eurozone inflation is essentially at target and economic recovery is still expected in coming months, but there are downside risks to both growth and prices, Belgium’s central bank governor Pierre Wunsch told MNI.

Speaking at the ECB’s summer getaway at Sintra in Portugal this week, Wunsch said he was not uncomfortable with financial markets pricing another cut or two into the outlook for the eurozone.

“While not expressly calling for a cut myself, I can understand and see why further easing is priced in by financial markets. The risk is probably to the downside,” Wunsch said, though he noted that with domestic sources of eurozone inflation above 2%, the current policy stance is probably already mildly supportive. (See MNI INTERVIEW: ECB Should Stay At 2% If Outlook Holds- Demarco)

The outlook for headline inflation is currently benign, he said, with projections showing the risk of a modest undershoot for a couple of quarters in early 2026. Wunsch, a critic of ECB modelling in the early years of the pandemic inflation surge, said projections for a year out were now looking far more accurate, though they were still a little cloudy at the end of the medium-term horizon.

OUTLOOK RISKS

The uncertain global outlook means risks to both growth and prices are to the downside, Wunsch said. He pointed also to slowing wage growth across much of the region, noting that earnings growth in France particularly was “very weak”. (See MNI INTERVIEW: Solid Q2 To Back 1 More Cut- ECB's Centeno)

In light of the outcome of the ECB’s assessment of its 2021 Strategy Review, Wunsch said it was right for the Governing Council to keep its current policy toolbox in place but that it should ensure robust debate over any future use.

“I was one of the critics of the overuse of QE in the past, but I have never said we should close the door on it. It must remain in the toolkit, but its future implementation should be considered carefully,” Wunsch said.

“All the tools must remain, but we must be more considerate in their use if needed again,” he said, adding that forward guidance in particular should only be considered as a last resort.

NEARLY DONE

Asked whether the ECB’s assessment might have erred on the side of self-congratulation, Wunsch said inflation was back at target, but there was still some stickiness in domestic price levels. 

“We have returned inflation to target and the economy has been resilient and showed at least modest growth across the economy. That is good news,” he said. “The consensus is our job is nearly done, but it is not for me to declare victory.”