Fight Inflation Now To Face Less Painful Trade-Offs, ECB’s Vujčić Says
20 April 2023
By Xavier D’Arcy – LJUBLJANA (Econostream) – The European Central Bank needs to bring inflation down sooner rather than later to avoid unnecessary economic hardship, ECB Governing Council member Boris Vujčić said on Thursday.
Speaking at an event organised by the Bank of Slovenia, Vujčić, who heads the Croatian National Bank, said that Eurozone inflation was now mostly driven by demand side factors.
‘Once [inflation] gets built into the expectations, it's more difficult and more costly to bring it down, the sacrifice ratio is higher. I think that the sacrifice ratio is lower, if you do it in a shorter period of time than if you prolong it’, he said.
In the Eurozone, he said, ‘now inflation is more demand than supply-side driven. And you wouldn't have had this kind of demand-pull [inflation] if we didn't have supply chain issues in the first place. So that's how this is the logic of the enemy, which is called inflation.’
Croatia would have had to undertake more aggressive rate hikes had it not joined the Eurozone in January of this year, he said: ‘If we were out of the Eurozone, we would have been forced to increase probably the interest rates more because of the pressure on the foreign exchange market.’
He warned that ‘we have to be vigilant, and we have to try to bring [inflation] down as soon as possible. Because also if it stays elevated for a longer period of time, then it goes into expectations.’
For EU members still reluctant to join the Eurozone, he said, ‘my advice is to join. I'm saying that in Prague, I'm saying that in Warsaw, in Budapest.’ Following his lecture on the Croatia’s experience of joining the single currency during a period of high inflation, he noted that ‘these countries have less incentive to join the euro than Croatia, because they don't have the euroization’ that Croatia had before joining, with a large majority of household and business debt denominated in euros in the Balkan economy.
The impact on prices of Croatia joining the euro in January 2023 was roughly 0.4%, according to the central bank’s calculations, he said. This was roughly in line with the experiences of other members who recently joined, he argued, and was rather positive news considering the prevailing high inflation rates at the time of Croatia’s accession.