By Balazs Koranyi SINTRA, Portugal (Reuters) -Euro zone inflation is at risk of falling short of the ECB's target and there is a case for the bank to provide a mildly supportive policy stance, Belgian
ECB May Need to Adopt Mildly Supportive Stance Amid Low Growth
By Balazs Koranyi
SINTRA, Portugal (Reuters) -Euro zone inflation is at risk of falling short of the ECB's target and there is a case for the bank to provide a mildly supportive policy stance, Belgian central bank Governor Pierre Wunsch said on Wednesday.
The ECB has cut rates by two full percentage points since last June, and its 2% deposit rate provides a so-called "neutral" setting, which neither slows nor stimulates economic growth.
However, the growth outlook was muted and inflation could be pulled down by a host of factors, suggesting that neutral may not be enough, Wunsch argued.
"There is an argument for providing a mildly supportive policy stance," Wunsch told Reuters in an interview. "If the recovery is delayed — and it has been delayed a few times — and output is below potential, then being supportive is rational."
He added that the euro's surge to 1.18 against the dollar, its highest level since late 2021, was also an argument to provide this support, since the stronger currency would dampen inflation and could also weigh on economic growth.
Cheap imports from China, lower energy prices, the lack of tariff retaliation, the strong euro and a substantial slowdown in wage growth were all putting downward pressure on prices, Wunsch said, joining Portuguese policymaker Mario Centeno and Finland's Olli Rehn in warning about the risk of too-low inflation.
"All these factors combined suggest that the upside risk is limited and the overall risk is to the downside," Wunsch said.
ECB projections see inflation below 2% for 18 months from the third quarter, before a return to target in early 2027.
Financial markets anticipate one more rate cut from the ECB later this year, taking the deposit rate to 1.75%, a stance some already consider to be mildly stimulating.
"I don’t disagree with market pricing for interest rates," Wunsch said. "I won’t endorse expectations but I am also not uncomfortable with them either."
But Wunsch also appeared to play down worries that ECB rates would have to go too deep, arguing that the economy was holding up well.
"I am not overly concerned about growth," Wunsch said. "Recent national PMI numbers were rather comforting. German fiscal plans are also game changing. Major fiscal expansion by a country that can afford it, provides a major boost."
(Reporting by Balazs Koranyi; Editing by Alex Richardson)
