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ECB Broadly Comfortable With Market’s Rate-Cut Bets, Wunsch Says

(Bloomberg) -- Investor bets on how much lower the European Central Bank’s interest rates will have to fall are relatively consistent with policymakers’ own assessments, according to Governing Council member Pierre Wunsch.

Asked about wagers on four to five more quarter-point cuts from the current 3% level, the Belgian official said “we’re broadly comfortable.” He cautioned that this pricing is likely to change again as borrowing costs move closer to a level that neither constrains nor stimulates economic growth — also referred to as neutral.

“There is a relatively broad consensus that we need to remove restriction and probably go to something that is close to neutral,” Wunsch said in an interview in Brussels. “But we don’t know where that is. When you look at the estimates, there are very broad confidence intervals, so it’s going to be trial and error. Then there will be other shocks at the margin, which could push us above 2% or below 2%.”

The ECB cut rates for a fourth time last week, signaling that further easing is on the way as borrowing costs are still deemed to restrain economic expansion. Even more hawkish officials have said they’re in favor of gradually moving to a neutral setting after price pressures eased significantly.

At the same time, Wunsch argued that inflation isn’t at risk of falling below the ECB’s target — even as a recovery in the region struggles to take off.

“I don’t think the risk of undershooting the inflation target has increased lately because services inflation remains quite high,” he said. “While I buy the argument that there is now a slowdown in growth dynamics, when you have wage growth of 5.4% like we had in the third quarter, I don’t see inflation falling to close to zero after that.”

President Christine Lagarde said earlier Monday that the ECB is now “close to achieving” its 2% inflation target. While price growth in services is still elevated, recent data suggest that a slowdown can be expected in that sector as well.

According to Wunsch, inflation risks are “relatively balanced” in the euro area. The impact of the kind of tariffs that Donald Trump has pledged to implement when he returns to the White House would depend in large part on foreign-exchange markets, he said.

“If there’s a big depreciation in the euro, then the impact on growth might not be so big, but it might be inflationary at the margin,” he said.

--With assistance from James Hirai.