ECB’s Vujčić: Can Act Sooner if Inflation Falls Faster Than Expected

11 January 2024

By David Barwick – FRANKFURT (Econostream) – The European Central Bank can loosen monetary policy sooner than it would otherwise if inflation were to weaken more quickly than projected, ECB Governing Council member Boris Vujčić said Thursday.

In remarks at a virtual event, Vujčić, who heads the Croatian National Bank, said, ‘If we see a faster decline in inflation than we forecast ... then of course we can move also earlier. It's not excluded.’

Other key comments by Vujčić include:

‘[O]n the labour market, I would say that the labour market has surprised everyone. We have seen significant slowdown in the economy without the labour market so far, up until recently, weakening to the extent [of] the previous episodes of decline in the GDP growth. So, this time is different. It’s rarely different, but this time it’s really different in the labour market. And what, personally, I try to understand, and I think many of my colleagues that I talk to, is whether … something in the nature of the labour market has changed. And what kind of the reaction function in labour markets to the economic activity developments we can expect in the future. And I think the jury's still out. We're not certain. … We also know that the pandemic has changed also the way labour markets operate … there's much more work from home, there's much more distance work. The way that the companies decide on hiring and firing has also changed as a consequence of some experiences … during the lockdowns and the pandemic. And we now still have to see whether that has some permanent impact on the labour market or not, whether we have some new irregularities that we can detect. What we do see now is that the unemployment rate we expected in our projection, the unemployment rate will go up a little bit, but that's really a little bit. It's not, it's not definitely a concern, it's kind of a … consequence of the economic activity. And if you think about it, … it's still much less than what we saw previously in the previous episodes of the same kind of slowing down of the … economic activity. Now, if the inflation rate comes down faster … than we expect at the moment, that will definitely impact our decision-making … on the rate moves, because this is one of the three elements that we always emphasise we look at.’

‘What we like to see is markets aligning more with the way we think. But personally, I am among those that have less problems with seeing markets being probably further away than we would generally like them to be … in terms of the pricing. So, I personally am not very … concerned or upset … by that fact. I think we still have to continue to explain how do we think, try to explain our reaction function, and let … the market price. They have been pricing differently probably than the Governing Council wanted them to in the past as well, as you know. And sometimes they were right, sometimes they were wrong. So that's the nature of the job.’

‘[W]e’re seeing the 4.5% [wage growth] in our projection. But there’s quite a bit of uncertainty about that. It could end up higher or lower. … If it's going to be at 4.5% as we projected, then, of course, there is still this component that I mentioned before, where 4.5 might not be compatible with the inflation rate coming down to 2.7% in 2024, on average, or closer to 2% … by the end of the year, if we don't get some compensation on the unit profit front, so if companies do not pack all these wage increases into the prices on to the final consumers. That depends on the market power, pricing power … of the companies, which we think, given that the economy has slowed down, and when we talk to the companies is now not as strong as it was before. And we do think that part of that wage increase … will not be passed on to the final consumer… But again, that remains to be seen. … And my feeling is at the moment is that they [companies] are, at the beginning of 2024, less capable or willing of passing fully any increase in the input costs on to the final consumer, which, if it is so, will help us to bring down the inflation even … with the wage growth of close to 5%.

‘[T]his [Q1 wage growth] is a very important piece of the puzzle. And we do know … that most of the wage negotiations will be done … in the first quarter. So, this will be a very valuable piece of data. It's not that much will happen directly, no. But once we get these data, we will know where we are on  that front, … which is something … that we need to know. But don't forget, I mean, there are other things also that might impact the inflation rate, not only … the labour market wage development. … So, it's not only the … upside risk in terms of the second-round effect of wages, inflation expectations and profits, but also we have this other risk … on the downside which might materialise.’

‘… I feel the risks [are] really balanced at the moment, and I think we definitely [have] avoided the risk of not doing enough. Let's see how things will develop … over the next few months, but then I would say personally, I'm more relaxed about it that we're at the right point at the moment … in terms of the monetary policy stance.’

‘[The] December projection is still relevant. We have not seen such a depart … in the data that we got meanwhile, over the last month or so, that it would make it less reliable. … And I think by March again, we'll get very important bits of information … for the March round of the projection, but at the moment, I don't expect it to depart much from what we've seen in the in the December projection.’