ECB’s Wunsch sees 4% rates possible if inflation stays high

BLOOMBERG

European Central Bank (ECB) Governing Council member Pierre Wunsch said market bets for interest rates to reach a 4% peak may prove accurate if underlying price pressures remain elevated.
How far borrowing costs must rise “depends very much on the evolution of core inflation,” the Belgian central bank chief said, referring to the measure of consumer-price growth that strips out items such as energy and food.
“If we don’t get clear signals that core inflation is going down, we’ll have to do more,” he told journalists in Brussels.
That means “looking at rates of 4% would not be excluded,” Wunsch said. “But I want to insist, I won’t make any judgment on where rates would have to go without seeing developments in core inflation.”
Officials are increasingly focussing on underlying prices to determine the monetary-policy path. The gauge surprisingly hit a record 5.6% in February — even as headline inflation eased slightly, figures showed.
National data foreshadowing the euro-area report prompted investors to raise their wagers on how far the ECB will have to take borrowing costs, pricing a peak of 4% for the first time.
Economists are following suit. Barclays, Bank of America, BNP Paribas, Danske Bank and Morgan Stanley all now predict that the deposit rate will eventually reach that level, sharing much of Wunsch’s reasoning.
“A much later peak in core inflation is the catalyst for more ECB hikes in the months ahead,” Morgan Stanley economists led by Jens Eisenschmidt said in a report to clients. “Our new inflation path sees the ECB being confronted with rising core inflation at the May meeting.”
Central bankers are worried that such stubborn pressures will lead workers to seek higher salaries, potentially triggering another round of price increases and complicating the task of returning inflation to the 2% target. But ECB officials have generally been less keen than Wunsch to discuss the 4% rate peak priced by investors.
Bundesbank President Joachim Nagel said he’s “much more comfortable now how the markets see our role,” though he declined to speculate on the so-called terminal rate.Governing Council members Bosjtan Vasle and Madis Muller said simply that they see more hikes beyond this month, while Vice President Luis de Guindos called the evolution of core inflation “very, very important.”
Policymakers debated exactly that subject at their last rate-setting meeting in February, according to an account.