ECB should wait to cut rates, then take a bet – Wunsch

FRANKFURT (Reuters) – The European Central Bank should wait for more wage data before cutting interest rates but it will then have to take a gamble on whether inflation is falling for good, ECB policymaker Pierre Wunsch said on Thursday.

The Belgian central bank governor also expressed scepticism about the ECB’s climate strategy, championed by President Christine Lagarde, including its climate-focussed stress test of European banks.

After raising rates to record highs, the ECB is widely expected to start cutting them later this year, with the debate now focussed on whether it would start already in April or later.

Wunsch sided with fellow hawks — or policymakers who favour higher rates — in saying that the ECB should wait to get more data about wages, which are now regaining some of the ground lost to inflation in the past two years and are a driver of price growth.

But, using unusual language for a central banker, he said the ECB should then take a bet even if it does not have all the data it needs.

“Let’s be honest, we won’t get full comfort within a reasonable period,” Wunsch said at an event organised by think tank Bruegel. “So I think there is some value to waiting to get some more detail on wages, but at some point we are going to have to bet on where inflation is going.”

Official data about labour costs for the first quarter of the year will only become available in May but the ECB is monitoring ongoing negotiations and more timely measures such as the Indeed Wage tracker.

Wunsch said wage growth was showing a deceleration, but “not a very strong one”.

Investors are putting a 50% chance on the ECB reducing the rate it pays on bank deposits by 25 basis points in April, with just under five cuts priced in by the end of year to take it to 2.5%-2.75%.

‘NO ROOM’ FOR CLIMATE SUPPORT

Wunsch appeared to criticise the ECB’s public support for the fight against climate change, which has seen it incorporate some environmental considerations in they way it picks corporate bonds under a policy scheme and in its supervision of banks.

He said the ECB should leave elected politicians to set the course, for example in setting carbon prices, and refrain from offering support that would in fact amount to making policy.

“It’s for politicians to decide what’s the right trade off and…there is no room for support,” he said.

He praised Federal Reserve Chair Jerome Powell, who said the Fed was not a climate policymaker.

“Honestly, the ECB has been less clear on that front,” Wunsch said. “I don’t think the rules of engagement are very clear conceptually.”

In addition, Wunsch said he was not convinced by the scenarios used in the ECB’s climate-related stress tests of European banks, including a sudden, policy-driven surge in energy prices in a scenario in which the climate transition is delayed.

Source: Investing.com