ECB’s Vujčić: Cutting Faster Would Need ‘A More Significant Departure From Our Projections’

13 January 2025

By David Barwick and Marta Vilar – ZAGREB (Econostream) – The European Central Bank remains unlikely to accelerate the pace of its monetary policy easing, according to Governing Council member Boris Vujčić.

In an interview with Econostream on Thursday (transcript here), Vujčić, who heads the Croatian National Bank, endorsed expectations of regular cuts while arguing for the ECB to maintain a cautious and gradual approach, given that developments were still consistent with its projections and uncertainty was still high.

‘To speed up the current pace of cutting, we would need a more significant departure from our projections, data-wise’, he said. ‘At the moment we don't see this, because developments are broadly in line with our projections.’

Elevated uncertainty made it imprudent to take large steps even if the direction of monetary policy was clear, he indicated. Inflation remained high, in particular for services, wage growth was still robust, and the geopolitical outlook was very cloudy, he reasoned.

‘In circumstances where uncertainties are still elevated, it's better to move gradually, and this is what we're doing’, he said.

Asked if market expectations of four or five consecutive rate cuts were reasonable, Vujčić said that ‘[i]n general, expectations of gradual, meeting-by-meeting cuts are justified by what we see in the data and in our projections.’

The level to which the ECB would go would have to be seen when closer to the natural rate, he said. ‘So, let's be cautious and move there gradually, and then we will decide at what level we should stop’, he said.

Vujčić rejected the idea that the ECB could stay on hold this month. Neither the Bank of England’s decision not to cut last month, nor the more hawkish outlook at the US Federal Reserve, dictated ECB policy, he said.

‘So, I can only say that from what I see now, the near-term expectations of the markets seem justified’, he said, and only if data were much worse than was probable would the ECB have reason to pause.

There remained a risk that the disinflation process would run into difficulties yet, he said. Although base effects this year should tend to reduce services inflation by two percentage points, new price pressures in that sector meant inflation there wouldn’t automatically decline from 4% to 2%, he said.

The repricing in the services sector that takes place in the first couple of months of every year should be more moderate in 2025 than in previous years, but there was no certainty about this, he said. ‘[W]e have to see, and that's why we have to be cautious and move gradually’, he said.

Ultimately, it would take most or all of the entire first half of the year before there was ‘much more clarity about whether services inflation will stay elevated or not’, he said.

The risks of either undershooting or overshooting the ECB’s inflation target were currently balanced and likely to stay that way, he said. By the same token, risks to inflation were also balanced, he said.

The euro’s exchange rate required careful monitoring, he said. Although not normally a key element for policymaking due to weak pass-through, the degree of pass-through could change considerably with circumstances, he said.

Under more normal conditions and with increased confidence in the ECB’s models, ‘you can put more weight on the forward-looking approach rather than the data-dependent, meeting-by-meeting approach’, he said.

This did not however mean that there would necessarily be a formal transition from one approach to the other, he said.