Wunsch Warns of Inflation Risks as ECB Tightrope Walks Divergent Policies

According to European Central Bank (ECB) Governing Council member Pierre Wunsch, there are still risks for consumer prices, including the possibility of a weaker euro due to divergent monetary policies between the ECB and the US. Wunsch, who is also the Governor of the National Bank of Belgium, warned that significant risks remain around the trajectory of wage growth and inflation in wage-intensive services, despite the fact that inflation in the Eurozone has temporarily stalled. While ECB officials have indicated that they will begin cutting borrowing costs at their upcoming meeting, the direction of rates beyond that is unclear and subject to controversy. Wunsch suggested that the ECB should proceed with caution, stating that “now is not the time to commit to a preset course of action”. He also called for greater flexibility in interpreting the 2% inflation target to avoid making errors like expanding quantitative easing when inflation forecasts were close to 1.8% in late 2021. Another council member, Austria’s Robert Holzmann, cautioned against rushing to cut key rates too much or too quickly, as the ECB must make decisions based on the available data. These warnings come amidst concerns regarding the impact of potential delays to easing in the US and the role of the exchange rate in relation to monetary policy divergence between the ECB and the US Federal Reserve.