MNI INTERVIEW: ECB's Wunsch Sees Less Chance Of Another Cut

Risks to eurozone inflation are tilted slightly to the downside but the chances of a further cut to the European Central Bank’s Deposit Rate have fallen as the economy shows resilience to global trade disputes, National Bank of Belgium Governor Pierre Wunsch told MNI.

“I’m comfortable with current market pricing, so I think the risks on the inflation front are relatively limited, and relatively balanced,” he said in an interview Friday as IMF meetings concluded. “If I would have to make a choice I would say they are a little bit tilted to the downside."

"That might warrant at some point that we do more, but the likelihood that we go for a further cut has been receding over the last few months because the European economy has been probably a little bit more resilient than we thought,” Wunsch said. “I’m not excluding a cut, but, again, I think the likelihood has been receding, which is again in line with the market reading of the situation.” (See MNI SOURCES: Doubts Over EU Carbon Pricing Key For ECB Rates)

Disruptions from U.S. tariffs and to supply chains should not be a big source of upward inflation pressure, he said. Europe has not retaliated with its own levies, the euro's strength this year has made imports cheaper and U.S. tariffs drag on Europe's growth, Wunsch noted.

SUPPLY SHOCKS

“An appreciation of the dollar by 15% is not too different from a tariff of 15%,” he said. “For us it’s in the projection” like any other force influencing the economy, he said.

A potential upside risk to prices comes from China’s export restrictions on rare earth minerals because of their importance to some supply chains, he said, but downside pressures also come from euro strength and the flow of Chinese goods into Europe.

"If we have the argument that when you have a negative supply shock we should look through… when we have a positive supply shock that leads to lower inflation, we believe to some extent it’s going to be temporary, you can also look through,” he said.

The week of IMF meetings gave rise to discussions about U.S. trade protectionism and whether the global economy would be destabilized by a loss of the Federal Reserve's independence through political pressure or large deficits. (See: MNI INTERVIEW2: US And China Lack Power To Disentangle- Sheard)

Fiscal dominance isn't an immediate concern for the ECB but something to watch over the medium term, according to Wunsch.

THE COST OF CONTROL

“There are configurations of the world where we would need to hike rates and it clearly would lead to potential problems in terms of fiscal sustainability,” he said.

“It’s not only Europe, it’s the U.S., to some extent China. It seems that it’s ever more difficult in an environment where potential growth is going down and with population aging in our western democracies and maybe also in some other contexts to keep a balanced budget or at least to have a budget situation that is sustainable,” he said.

While governments will have the final say on central bank autonomy, Wunsch said independent monetary policy gets the best economic results. He also noted decreasing public trust in institutions, which has affected central banks after miscalculations around damage from Brexit, the inflation burst through the pandemic and balance sheet losses. 

“If the view of what a central bank should be doing, if there is a new consensus emerging around the mandate, they (politicians) will have the last word,” Wunsch said. “Will that have a cost? Yes it will have a cost.”