ECB's Wunsch says weaker euro may take edge off US tariffs
Wunsch says euro at parity vs dollar would offset 10% tariffs
Market bets on four more ECB rate cuts a 'meaningful' scenario
Adds comments on ECB's strategic review in paragraphs 11-14
By Divya Chowdhury and Francesco Canepa
MUMBAI, Dec 18 (Reuters) -A weaker euro falling to parity with the dollar would cushion the impact of any new U.S. tariffs on euro zone growth although it would push up inflation, European Central Bank policymaker Pierre Wunsch told Reuters on Wednesday.
The Belgian central bank governor said in an interview with the Reuters Global Markets Forum that market bets on four more ECB rate cuts next year were a "meaningful" scenario, but he was open to taking a different path should inflation and growth data require it.
The ECB cut rates last week on the back of a gloomier outlook and policymakers said the bank's already lowered growth projections could prove too optimistic if U.S. trade policy took a protectionist turn under President-elect Donald Trump.
But Wunsch said a lower euro exchange rate against the greenback could take the edge off any new U.S. tariffs on imports from the euro zone.
"We've already seen the euro depreciating maybe 4% or 5% against the dollar," he said. "So it would only take the euro to go to parity for a 10% tariff to be essentially compensated."
On the flipside, a weaker currency would push up inflation by making imports more expensive, Wunsch cautioned.
The Belgian governor, in the past seen as a hawk who favoured higher borrowing costs, said he expected the ECB's policy rate, currently at 3%, to fall by another percentage point if inflation settles at the ECB's 2% target, as it expects.
"I guess we will land at somewhere around rates of 2% on the basis of our forecast," he said.
He added that market bets on four more ECB rate cuts worth 25 basis points each in the next four meetings were broadly in line with the central bank's thinking.
"I am comfortable with it as a scenario that I find meaningful," he said. "It's relatively aligned to ours. But that's give or take."
The ECB is due to review its long-term strategy next year. Wunsch said the central bank should drop a reference in its strategy document to reacting in an "especially forceful" way to below-target inflation.
This is because extraordinary measures like massive bond purchases and negative rates were shown to be effective only when the economy is doing poorly while they have little traction when it is doing well, he argued.
"I personally believe that we will have a not-so-easy discussion on the issue of reacting forcefully when we see inflation moving below target," he said.
"I'm not sure there is this broad consensus that as soon as you move to somewhere below 2% - of course not on a purely temporary basis - that you have to react very forcefully."
(Join GMF, a chat room hosted on LSEG Messenger, for live interviews: https://lseg.group/3KFHrhe)
Reporting By Divya Chowdhury in Mumbai and Francesco Canepa in Frankfurt
Editing by Tomasz Janowski and Christina Fincher
Related Assets
Latest News
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.
