Member of ECB governing council predicted advocates for more quantitative tightening

Pierre Wunsch, a Belgian policymaker, has said that the European Central Bank needs to reduce its balance sheet. The institution could also halt reinvesting cash acquired from debt maturing in the largest bond-buying scheme to complement additional hikes in interest rates.

Belgian policymaker advocates for more rate hikes

The ECB will hike the interest rates to fight stubborn inflation. These levels have increased at the highest rate on record. The ECB has also been reducing its bloated balance sheet amid talks that more expensive borrowing will affect demand and tame sky-high inflation.

Wunsch, a member of the ECB Governing Council, also said that the ECB needed to conduct more quantitative tightening. He further called for the institution to halt reinvestments this year, and even if this is done, it would still take time to affect the portfolio.

The ECB has also said they will support 15 billion euros of debt monthly. The funds will expire the company’s 3.2 trillion euro Asset Purchase program. Wunsch has also argued that the process has been successful so far. He said the market reacted well, and the balance sheet was still ballooning.

Wunsch was among the first policymakers in Europe to amid that Europe had an inflation problem. He had said that the ECB needed to keep the interest rates high. He noted that the market expected that the rates would be increased by another 75 basis points, adding that such numbers were reasonable. However, he said that rate cuts this year were not likely.

“I think May will be about 25 or 50 basis points. If there’s another upside surprise in core inflation and the (ECB’s quarterly) lending survey doesn’t look bad, we might have to do 50. If there is a positive surprise in the core, then perhaps 25 is more appropriate,” he said.

The markets expect the ECB to increase the deposit rate from 3% to 3.75% by September this year. However, a reversal is also to be expected, contrary to the Fed’s expectations that after the rates are increased, they will remain at that level for some time.

Eurozone inflation remains stubborn

Despite the efforts being made to tame inflation, the underlying inflation levels have continued to increase. Inflation is rising and defying expectations, showing that the ECB does not entirely understand the price dynamics.

Wunsch noted that one of the concerning issues was the figures reported in December. The policymaker said that in December, inflation was projected to stabilize before declining by 5%. Inflation was now at 5.7%, and there was a likelihood that a higher deviation from December levels would be seen again.

The core inflation level is also expected to drop after massive energy cost declines. However, there are risks that inflation will hold levels above 3% longer before the economy cools.