The Eurozone risks “sleepwalking” into making too many interest rate cuts and needs to stand ready to stop lowering borrowing costs soon, the head of Belgium’s central bank has said.
Markets widely expect the European Central Bank to cut its benchmark deposit rate from 2.75 per cent to 2 per cent by the end of the year, amid signs of weak growth in the region.
While most rate-setters are expected to back another 25 basis-point cut at the next policy vote on March 6, some on the 26-member governing council have become concerned that the ECB is becoming boxed in by market expectations and think another lowering in borrowing costs in late April is far from guaranteed.
“I’m not pleading for a pause in April but we must not sleepwalk to 2 per cent [interest rates] without thinking about it,” said Pierre Wunsch, governor of the Central Bank of Belgium, in an interview with the Financial Times on Friday. “Let’s keep it open: If the data justify a new cut, we’ll cut. If they don’t, we might have to pause.”
Isabel Schnabel, an influential member of the bank’s six-body executive board, has also signalled that the ECB could be almost done with interest rate cuts after reducing the deposit rate from 4 per cent to 2.75 per cent since June.
However, while Schnabel warned explicitly of mounting “upside risks” to inflation, Wunsch said he remained “relatively relaxed about the inflation outlook”.
“Assuming no big shocks, I think the risks on the downside and upside for inflation are relatively limited,” he said, adding: “Inflation in Europe might be the boring part of 2025, and 2025 is not going to be boring.”
Wunsch also questioned markets’ interpretation of remarks ECB President Christine Lagarde that borrowing costs were on autopilot and would hit 2 per cent by the end of this year.
The Belgian central bank governor told the FT that Lagarde’s statement after the January cut that the ECB “know[s] the direction of travel” and that monetary policy was “directionally” on a “downward slope” was “a good reflection that we felt comfortable going from 3 per cent to 2.75 per cent and that we might see one or two rate cuts to go”.
“At some point — and it might be at one of the next meetings depending on whether we have a surprise or not — we may have to consider whether we are not only moving in the right direction, but also at the right pace,” the Belgian central bank governor said.
Lagarde also told journalists after the ECB January rate cut it was “entirely premature” to start thinking of a change of course.
Since then, inflation unexpectedly ticked up to 2.5 per cent in January — the fourth rise in a row. The ECB’s medium-term target is 2 per cent.
Wunsch pointed to mounting uncertainty over the appropriate level of interest rates, stressing that he was “not even sure” if rates were still at a level that was restricting growth and inflation.
Wunsch said that the ECB was now facing the task of “fine-tuning” its policies “around a soft landing”, adding that this may involve “a little bit of trial and error”.
Wunsch said he felt “relatively comfortable” with the market expectation of 2 per cent rates by the end of the year “give or take 50 basis points”. He also said it was “even possible that we will go below 2 per cent” by then, depending on the wider economic environment, external shocks and price pressure.