ECB could cut interest rates and rethink inflation forecast models – Funch

FRANKFURT (Reuters) – The European Central Bank can cut interest rates this year but must rethink the models on which it bases inflation forecasts that influence monetary policy choices, Belgian Central Bank Governor Pierre Wunsch said.

The ECB promised to cut interest rates on June 6, but has sent few signals about subsequent moves, given rising services inflation and concerns that delays in easing monetary policy by the Fed could force it to stall.

However, Funch spoke of the possibility of further action, arguing that too restrictive monetary policy now poses a greater risk than easing too early.

“Although the outlook is still uncertain, I see the possibility of starting to lower interest rates this year,” Funch said at a conference in Frankfurt.

“With no signs of decoupling in the longer term, the costs of prolonged monetary policy tightening appear to be greater than the costs of premature easing,” said Funch, one of the first central bankers to point to the risk of the recent rise in inflation. .

More generally, Funch criticized the way the ECB forecasts inflation, given the poor accuracy of its forecast models, especially in times of economic volatility.

“Models may not always be a reliable compass,” Wunsch said. “We were led to believe that inflation was temporary, only to discover that it was not.”

“This highlights the need to reassess…the role of model-based projections in policy making,” he added.

(Translated by Luca Fratangelo, Edited by Francesca Bissoneri)