ECB’s Vujčić: Rates Not Yet Restrictive, But About To Get There

27 February 2023

By David Barwick – FRANKFURT (Econostream) – European Central Bank key interest rates are not yet in restrictive territory, but will soon be there, Governing Council member Boris Vujčić said Monday.

In an interview with Bloomberg, Vujčić, who heads the Croatian National Bank said, ‘Now I would say we are about to get into a restrictive territory. Probably [rates now are] not yet restrictive. Particularly given that we are now operating in the floor system.’

Vujčić confirmed the likelihood of a 50bp rate hike in March. Futher out, the ECB would decide on a meeting-by-meeting basis, and ‘when the data come in, we will decide what to do’, he said.

The terminal rate of the current hiking cycle will also be a data-driven outcome, he said, declining to be more specific and citing ‘so many surprises with the inflation data before.’

Core inflation would be a critical component of the ECB’s reaction function, he indicated.

‘We might get into a situation where headline comes under the core, which will be then a challenge for a communication’, he said. ‘But as long as the core persists at the levels that we are talking about, and this is significantly higher than our rates are and significantly higher than where our target is, we should persevere and we should really bring it down to the levels where we need it to be in the medium term.’

The policy tightening by the ECB to date has been having an effect, he said, in particular in mortgage markets. This was ‘welcome, because if there was one segment of the market where you saw a lot of froth, that was definitely mortgage markets, and macroprudential measures that were widely used recently had little chance to deal with it as long as the rates stayed as low as they used to be.’