ECB’s Vujčić: Confident Coming Months to Bring Inflation Decline, But Must See What Happens Next

29 September 2023

By David Barwick – SKOPJE (Econostream) – Euro area inflation was quite likely to decline over the next months, but the true test for a return to price stability would be next spring or so, European Central Bank Governing Council member Boris Vujčić said Friday.

In remarks at a conference of the National Bank of the Republic of Macedonia, Vujčić, who heads the Croatian National Bank, said that the current situation was ‘quite difficult in many ways’ and that in considering ‘past experiences with inflation reduction’, it was ‘difficult to find an example’ of success that did not entail a high economic cost.

‘Usually it involved a recession’, he said. ‘Hopefully … we are able to get inflation back to target without causing a recession. This is what we project now…’

Vujčić said he was ‘quite confident that we will see now in the next few months a decline in the inflation rate.’ However, he said, ‘the challenge will be in spring of next year to see whether the inflation path’ has lived up to projections or is proving bumpier than expected.

‘This is a risk of the disinflation process in an environment of a soft landing and strong labour markets and significant wage growth’, he said. ‘So, you might get into a situation where the inflation rate, the disinflation process, stops at a level which is not your target, and then it’s challenging for monetary policy, because it has to do something more … to bring it all the way down to 2%.’

Financial stability looked ‘quite good at the moment’, but risks in this respect could re-emerge, and there were many unknowns lurking, he said, pointing to geopolitical risks, energy and food prices, and climate change.

‘So, there are lots of uncertainties ahead of us and we have to be very careful’, he said.

Banks were currently enjoying ‘good times’, and stress tests indicated that banks were in good shape, he said. ‘So I would not be very much worried’, he said.

Still, even if it were the case that ‘the short term is very good for the banks’, that could change, he emphasised. ‘[M]aybe three-four years down the road, it might not look that good’, he said.

Should the euro area economy experience a hard landing, this would ‘affect asset quality of the banks much more profoundly’, he said. Excess liquidity was also an issue that could affect the banking sector’s longer-term robustness, he said.