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ShreeMetalPrices: ECB Should raise rates again in May, Wunsch says


In an effort to combat persistent inflation, the European Central Bank (ECB) has accelerated rate increases and reduced its massive balance sheet in the hopes that higher borrowing costs will stymie demand and bring inflation under control.

A member of the ECB’s Council of Governors named Wunsch told on the eve of the International Monetary Fund & the World Bank’s spring meetings in Washington, D.C. That “we want to do even more quantitative tightening.” “We could stop reinvesting entirely this year, and even then, it will require year to deplete the portfolio.”

Wunsch stated that the ECB’s 3.2 trillions euro Asset Buy Programme is currently letting 15 billion euros of debt mature each month. And the process has been going smoothly so far.

He remarked, “Our cash sheets is still too big and the market has responded very well.”

The ECB needs to keep rising interest rates, according to Wunsch. Who was one of the first economists to spot Europe’s inflation crisis last year. The market’s estimate for an additional 75 basis points of hikes is “reasonable.” But predictions of a rate drop before the turn of the year are not.


Wunsch predicted that May will be between 25 and 50 basis points. “We might have to do 50,he said, “if there’s another upward surprises in core inflation and the (ECB’s quarter) lending survey doesn’t look too bad.” “Perhaps 25 is more appropriate if there is a positive surprises in core.”

Markets currently expect the ECB to increase its 3 percent deposits rates to 3.75 percent by September. But after that, they anticipate some reversal, going against the ECB’s statement. That once prices peak, they will stay there for some time.

I don’t see any swift policy change until we achieve the terminal rate, he said. “Given the wage dynamic will be unsustainable with the 2 percent inflation goal for years & the real rates remain low.”

The underlying inflation rate is still rising and looks to be defying every expectation. Which indicates that the the European Central Bank does not fully comprehend these price dynamics. This is currently the biggest issue facing the euro zone.

The fact that we predicted core inflation to stabilise at 5% before declining in December is particularly worrisome, according to Wunsch. “At 5.7%, the difference from that Dec projection could be one percentage point within a few months.”

Core inflation will still decline, especially after the sharp drops in energy prices become apparent. But Wunsch warned that there is a chance it might stay close to three percent for a longer length of time.