Pierre Wunsch, ECB Governing Council member and governor of the National Bank of Belgium, warned of the dangers to consumer prices - including the weakening of the euro - if the ECB's monetary policy deviates too much from the Fed's policy.
“One known unknown remains the role of the exchange rate and the risk of importing inflation. Diverging economic conditions and policies in the euro area and the US might lead to significant effects from the dollar-euro exchange rate,” said Wunsch.
ECB officials, including Wunsch, have made it clear that they will start cutting interest rates at their June meeting. However, ECB policymakers sent few signals about consequent moves. Meanwhile, Wunsch warned that maintaining a tight policy for too long now poses a greater risk than easing policy too early.
Commenting on the broader policy direction, Wunsch disagreed with how the ECB forecasts inflation, given the low accuracy of its forecasting models, especially during periods of economic instability. He called for a critical reassessment of modeling systems and the role of model-based forecasts in policy development, and added that current models do not take into account major economic shifts, the fight against extreme events and further inflation growth in the short term. "Thus, the ECB should pay more attention to short-term inflation expectations and wage dynamics, especially in the current environment of unusual volatility," said Wunsch, also calling for tolerating “some flexibility” in interpreting the 2% inflation target.