Article content

(Bloomberg) — European Central Bank Governing Council member Pierre Wunsch still sees dangers for consumer prices – including a weaker euro should monetary policy diverge too much from the US.

“Significant risks remain around the trajectory of wage growth and inflation in wage-intensive services,” according to the Belgian central banker, who urged caution even as interest-rate cuts are likely to start this year. “Now is not the time to commit to a preset course of action.”

Article content

Article content

Speaking Wednesday at the Centre for Central Banking in Frankfurt, Wunsch said that “one known unknown remains the role of the exchange rate and the risk of importing inflation.” Diverging economic conditions and policies in the euro area and the US “might lead to significant effects from the dollar-euro exchange rate,” he said.

ECB officials including Wunsch have signaled they’ll begin to lower borrowing costs at their June meeting following a barrage of hikes. What happens after is less clear and more controversial, with many analysts also speculating how a potential delay to easing in the US will affect the euro area.

“While monetary-policy tightening was remarkably synchronous around the world, easing cycles appear unlikely to exhibit similar synchronicity,” Wunsch said.

Though inflation in the 20-nation bloc stalled for the first time this year at 2.4% in April, an underlying measure that excludes volatile items including energy and food continued to retreat. Even more importantly, services inflation slowed after being stuck at 4% for five straight months.

Article content

Chief Economist Philip Lane said Monday that recent euro-area data have made him more confident that inflation is returning to the 2% goal – calling the easing in services pressures “an important initial step in the next phase of bringing inflation down.”

“Although the outlook remains foggy, I see a path for initiating rate cuts this year,” Wunsch said. At the June meeting, “more will be known” about wage and services dynamics, he said. But he also reiterated that at some point the ECB must decide — even if uncertainty persists.

With “no sign of de-anchoring” of inflation expectations in the longer term, “the costs of remaining tight for too long seem to outweigh those of a premature loosening,” he said. In mid-April he told Bloomberg that the ECB’s decisions will become tougher after the two first cuts.

Wunsch also called for tolerating “some flexibility” in interpreting the 2% inflation target. “This is to avoid mistakes such as the decision to expand quantitative easing when inflation forecasts hovered around 1.8% in late 2021,” he said.

Article content