P. Wunsch (ECB): ‘Self-evident’ interest rates at zero or above by the end of the year

The European Central Bank could raise interest rates above zero before the end of the year, and may need to implement a more “restrictive” policy to bring rising prices under control, said a member of the bank’s board. Pierre Wunsch.

In particular, in an interview in Washington on Wednesday night, the Belgian central banker said that although the war in Ukraine poses a significant risk to the economy, it is unlikely to prevent the ECB from raising borrowing costs to meet the unexpected inflation.

“Without bad news from this front, raising (interest rates) by the end of this year to zero or slightly positive ground would be obvious to me,” Wunsch said.

According to Bloomberg, traders increased their ECB interest rate bets following Wunsch’s comments and now see an 80% chance of rising by 25 basis points (0.25%) in July. They also expect by December that the deposit rate will return to a positive sign for the first time since 2012.

Some members of the ECB’s board had suggested ending the bank’s bond markets at the end of the current quarter and raising interest rates from July, with Wunsch saying the timetable was clearly a possibility.

“It will of course depend on data,” added the Belgian central banker, adding that “if we have another surprise from inflation, it is definitely a scenario I would consider.”

Mr Wunsch also said that a possible disruption of gas flows from Russia posed a significant risk to the eurozone, but that this would not prevent the ECB from tightening its monetary policy stance.

“There are, of course, situations in which if the shock is too great for the real economy, we would be more comfortable looking at the evolution of inflation,” he said. “But we are still in a state of supportive monetary policy. Real interest rates today are very, very negative. Therefore, the start of the monetary policy normalization process should be relatively independent of the real economy,” he added.

In addition, Mr Wunsch would not rule out the possibility of the ECB taking more drastic measures to curb inflation.

“We are still talking about normalization, but I would not rule out that at some point, if we have secondary effects, if wages go up, this monetary policy may need to be restrictive,” he said.

As he explained, “for me the markets today are pricing the low side of what might be needed to bring inflation under control.”