ECB’s Wunsch says weaker euro may take edge off US tariffs

5:21 am Wednesday, December 18th, 2024

By Divya Chowdhury and Francesco Canepa

MUMBAI (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.”

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(Reporting By Divya Chowdhury in Mumbai and Francesco Canepa in FrankfurtEditing by Tomasz Janowski and Christina Fincher)