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MNI INTERVIEW: ECB Should Hold Until At Least Spring-Vujcic


The European Central Bank should keep key interest rates on hold until at least spring or early summer of 2024, Croatian National Bank Governor Boris Vujcic told MNI, after preliminary data showed inflation falling faster than anticipated.

Average eurozone headline inflation fell to 2.9% from September’s 4.3%, according to a flash estimate, a decline Vujcic called “a bit more” than expected.

“In the absence of a new shock, I do not see a reason to adjust the key interest rates for some time. Not until we get a clearer picture of the growth and inflation outlook, both for 2024 and 2025 - and I don't expect that before well into the spring of next year or the beginning of the summer,” he said in an interview after last week’s ECB decision to keep interest rates unchanged following 10 successive hikes. (See MNI ECB WATCH: ECB Holds Rates As Inflation, Growth Slow)

Core inflation only dipped from 4.5% to 4.2% between September and October - confirming Vujcic’s assessment that underlying price pressures mean it is too soon to discuss cutting rates.


“For the time being, we are sticking to our forecast, which envisages that we will get back to the target only in 2025. Timing that is now in our current projection might, of course, change, but let's leave it to the incoming data to show us which way we're moving. It’s definitely too early to announce that inflation may converge to the target even sooner.”

Asked if doves could push for discussions over when to loosen policy by as soon as December’s meeting, Vujcic said that while “at some point some people will certainly want to discuss rate cuts [...] so far there has been no indication of that.”

Faster pass-through of monetary tightening and a softening economy could lower inflation faster than expected, while upside risks include an energy shock, he said.

“If there is a substantial supply side shock coming from geopolitical tensions - which is, at the moment, probably the main short-term risk - then we will of course have to see the exact nature of that shock, the extent of that shock, and then decide what we want to do,” he said.

Labour markets are strong and wage pressures remain “relatively high,” he continued, with many pay deals to be negotiated in the coming months. “Bar the geopolitical risks or the risks from some kind of a supply-side shock in energy or food markets, wage growth remains the main risk for inflation projection.”

Some recent growth data has been softer than expected, Vujcic conceded, noting that the eurozone’s already stagnant economy is unlikely to see rapid improvement. But chances of a soft-landing remain good and even the possibility of a short, mild, technical recession is no reason to worry unduly.

“Particularly in a situation where we’ve increased the interest rate by 450 basis points and if we bring the inflation rate from a two-digit level back down to close to 2%,” he said.


Nor should the ECB’s recent Bank Lending Survey, which showed continued tightening of financial conditions coupled with declining loan demand, prompt excessive concern.

“We might see more tightening of credit conditions, although what the banks now tell us is that this tightening momentum is actually decreasing. If you look not at the BLS but at actual credit data, you can see a clear reduction in credit growth, but not a credit crunch,” he said.

“Credit is slowing down substantially, but we are still in a positive territory. Even the momentum has stabilised after substantial decline in the first half of the year, both for households and corporates. These trends follow GDP, which is almost stagnating, and credit is now also broadly stagnant, although one should have in mind that GDP is real, and credit growth is a nominal category.”

Spikes in bond yields have added to financial tightening, Vujcic said, although the effect on ECB policy remains unclear.

“Most of it has been a spillover of term premia repricing in the U.S., with a little bit of an idiosyncratic movement, like Italy after the latest fiscal announcement. Neither in the unexpected way,” he said.

MNI London Bureau | +44 20 3983 7894 |
MNI London Bureau | +44 20 3983 7894 |

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