ECB's next interest rate cut easy decision before choices become hard

The European Central Bank's next interest rate cut is still a relatively easy decision, but subsequent moves should only come once inflation is clearly heading towards the 2 per cent target, ECB policymaker Pierre Wunsch said in an interview.
 

The ECB cut rates in early June but made no commitment about any further moves, arguing inflation was still too high and it lacked the confidence that 2 per cent was within reach.
 

Wunsch already said at the time that the first two cuts were easy decisions and continues to maintain this view despite more recent figures showing stubborn wages and services price growth.
 

"If we have no major negative surprises, then based on our forecasts, I would say there is room for a second cut," Wunsch, Belgium's central bank governor told Reuters on Monday. "A small deviation from the projections would not change this view dramatically."
 

But even this second cut was not urgent, he said, and the ECB could wait until its next projections are due out in September.

"There is probably a premium in waiting for a meeting with new forecasts that confirm the picture but I would not make that a condition," Wunsch said.
 

Inflation is expected to have slowed to 2.5 per cent last month from 2.6 per cent in May, but the ECB sees a "bumpy" path ahead with figures oscillating around current levels for the rest of the year.
 

This could make it hard to cut again until figures start showing a more decisive move towards 2 per cent.
 

"To continue with cuts, I would need to have some more comfort that we really are going down from 2.5 per cent inflation to something which is closer to 2 per cent," Wunsch said. "Do you want to go below 1 per cent real spot rates? That's where it becomes a little bit more difficult for me."
 

The ECB's deposit rate stands at 3.75 per cent and markets are betting on about 40 basis points of cuts over the rest of the year, or between one and two moves, and also see a total of four cuts in the next 18 months.
 

While economic growth is rebounding modestly and markets are relatively calm, a first round election victory by the far right in France complicates the picture. Wunsch said more political turbulence is possible given several countries need painful fiscal adjustments after years of excessive spending.
 

"In Europe as a whole, we now have five countries in excessive deficit procedures," he said. "It's not going to be easy in any of those five countries. I was never expecting that reducing these deficits will be easy."
 

But he also played down any talk the ECB could activate an emergency bond purchase scheme in case political stress reverberated in financial markets.
 

ECB officials have said markets moves need to be unwarranted and disorderly for the ECB to step in, and events so far failed to meet those criteria.
 

"I think it's very important that we don't give any signal to the market that we have some kind of automaticity, limits, or hard constraints in what we do," Wunsch said. "The rule is that it must be unwarranted and disorderly. It will be a judgment call."

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