ECB’s Vujčić: ‘Likely to See More Rate Action Beyond March’
10 February 2023
By David Barwick – FRANKFURT (Econostream) – The European Central Bank is likely to continue hiking interest rates after increasing them in March, Governing Council member Boris Vujčić said Friday.
In an interview with Reuters, Vujčić, who heads the Croatian National Bank said, ‘Given where we are today, I would agree that we are likely to see more rate action beyond March. But we're going to wait for the data to come in and then decide in May, June, July what we’re going to do.’
As for next month, he said, the message last week ‘was quite clear: We will raise rates by another 50bp in March, barring some unexpected data surprises.’
Monetary authorities need not ‘pay too much attention to how markets react in the immediate follow up’, he said. ‘The credit channel is a more important transmission channel to our goal, and we should watch how that transmission works.’
The ECB did not have to determine its terminal rate at this point, he said. ‘We’ll wait for the data and assess accordingly’, he said. ‘So, let me just reiterate, from where we are now, given recent data and our projections, we are likely to see more rate action beyond March and I would leave the issue of the terminal rate for later.’
The question of how long rate hikes would continue was best left open, he said. Normally, ‘you hike for some time, might pause, or not, then might continue, depending on the data’, he said. ‘Then typically you would keep the rate there for some time until you are confident that the inflation is back to where you want it to be.’
He ‘wouldn't even want to talk about rate cuts while we’re still in the process of hiking’, he said.
Although the ECB needs to consider both core and headline inflation, the core measure ‘provides a clearer picture of the underlying inflation pressures and thus could serve as a guide to where headline inflation itself is heading’, barring shocks, he said. ‘In addition, when headline inflation has an important transitory component, a focus on core measures can help avoid monetary policy mistakes.’
To be confident that the ECB’s measures are having the desired effect, he said, ‘[w]e need to see a sustained decline in core inflation’, which ‘is still clearly too high.’
Various factors suggest that the next inflation forecasts will be revised down, he said, but the potential for errors in the underlying assumptions must be kept in mind. In any case, under conditions of elevated uncertainty, ‘you rely less on the projections, particularly on numbers further out’, he said.
Still, headline inflation had probably already peaked, he indicated, with the worry less an increase to yet higher levels than persistence of the current numbers.
The final phase of restoring price stability ‘could be difficult if developments of headline inflation are dominantly driven by core inflation which is usually sluggish, especially in the environment of rising wage pressures’, he said.
This would require tighter policy at a potentially higher economic cost, he said.
Headline inflation could however decline to target much faster than anticipated, leaving policymakers with the difficult task of having to ‘explain to the public why we are keeping restrictive monetary policy stance if headline inflation already fell’, he said.
‘However, the whole disinflation process may also be more and less challenging at the same time because we now seem to be in a better position than we were two or three months ago’, he said. ‘Conditions for a soft landing are clearly better.’
In this context, he cited economic resilience, relatively mild weather, cheaper energy, easing supply constraints, firm consumer confidence and service sector strength.