Transcript: Interview with ECB Governing Council member Vujčić on 9 January 2025

13 January 2025

Transcript: Interview with ECB Governing Council member Vujčić on 9 January 2025

By David Barwick and Marta Vilar – ZAGREB (Econostream) - Following is the full transcript of the interview conducted by Econostream on 9 January with Boris Vujčić, Governor of the Croatian National Bank and member of the Governing Council of the European Central Bank:

Q: The subject of a 50bp cut is a subject that doesn't die. What would it take for you to support a 50bp cut?

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

Q: It seems possible that we're going at least to neutral in the first half of this year. Doesn't it make sense to get it over with faster?

A: There's still a lot of uncertainties around our projections. Less than in the past, but we are still faced with high inflation, from the services sector in particular, and strong wage growth. And geopolitical risks, which are very difficult at the moment to predict. In circumstances where uncertainties are still elevated, it's better to move gradually, and this is what we're doing.

Q: Does the need to leave room for you to manoeuvre also justify this cautious approach?

A: Yes. If you move cautiously, you leave more policy room for manoeuvre in case you get surprised by unfavourable price developments.

Q: Market expectations are for the ECB to cut in every meeting, meeting after meeting, for a total of four or five cuts until we reach about 2%. Are these expectations reasonable?

A: In general, expectations of gradual, meeting-by-meeting cuts are justified by what we see in the data and in our projections. To what level, that we will have to see as we approach what one might consider the natural rate. So, let's be cautious and move there gradually, and then we will decide at what level we should stop.

Q: Given recent decisions by the Bank of England and the Fed, are markets underestimating the possibility that on January 30, it would be appropriate not to do anything, even to cut?

A: All three economies are different, and we are not dependent on the Fed or any other central bank. So, I can only say that from what I see now, the near-term expectations of the markets seem justified.

Q: So, it would take some improbably bad data to stay on hold in January.

A: Yes.

Q: Do you have any view as to where the neutral rate could be?

A: I'm reluctant to give an estimate of the neutral rate, or the terminal rate on the way down, as I was on the way up. Let's just move gradually, and we will find out when we are there.

Q: Some of your colleagues think the current projections understate the danger of undershooting the target in 2026 and 2027. Do you see this?

A: There are always risks of undershooting and overshooting. But the risks are now pretty much balanced. And as we are moving towards what one might call the neutral rate, we should try to make sure by our decisions that these risks stay as balanced as possible.

Q: For now, disinflation has gone pretty smoothly, but we've seen cases elsewhere of disinflation stalling. Do you think that this might happen in Europe as well?

A: There's a risk. Services inflation is a problem, which is why domestic inflation is so stubborn. Base effects in 2025 should take care of about two percentage points of services inflation. But services inflation won’t necessarily go down from 4% to 2%, because it depends on whether services inflation continues to exceed the historical norm. That is what we have to see, and that's why we have to be cautious and move gradually. Repricing in some parts of the sector happens in January and February, and was quite high in previous years. It should be lower this year, because overall inflation is lower. But we still have to see that happening. And then we're going to see how demand for travel and hospitality services in the second quarter will affect prices there. Also, we shall see more evidence on wage formation. So, in my view, the first half of the year should bring much more clarity about whether services inflation will stay elevated or not.

Q: Some governors have said that inflation risks were more to the upside; where do you stand?

A: The way I see them at the moment is that they are balanced.

Q: What if the euro continues to depreciate; at what point could that by itself lead you to pause?

A: The exchange rate has not weighed much on our policy decisions so far. It’s assumed that the pass-through of the exchange rate has been less than 10% for a long time in a low inflation environment. But we know that the pass-through is state-dependent, and in an environment of higher inflation, it increases. If you look at examples of other countries, including European ones, it can go up to 20% or 30% in a different environment. So, we have to monitor that carefully too.

Q: Once you stop cutting rates, would continuing QT be too much tightening?

A: The balance sheet normalisation is exactly what it says: a normalisation. It works in the background, gradually and predictably. The main policy tool is our set of key interest rates, not the balance sheet. For the time being, we should not worry about the balance sheet, not before excess liquidity has been significantly reduced. We don’t discuss interest rates with some level in mind that would make sense for us to stop the normalisation of the balance sheet.

Q: What about France? We assume that you're one of those who think that France should solve its own problems, rather than look to the ECB.

A: Obviously, every country should make sure that its fiscal policy is prudent, and every country is responsible for putting its fiscal house in order. And the TPI should be thought about with exactly the purpose that was behind its creation. Namely, it is meant to counter market developments unwarranted by fundamentals, but not to be used against fundamentals.

Q: At what point would it be right to move to a more forward-looking approach to policymaking?

A: Once the situation normalises and the models perform better than over the past couple of years, as they already are, you can put more weight on the forward-looking approach rather than the data-dependent, meeting-by-meeting approach. When there was lots of uncertainty due to a series of supply shocks, it was obvious that the most recent data contributed to our assessment of medium-term developments more than the forecasts. Now that's changing. So, in that sense, yes. I'm gradualy getting more and more confident that we are on the right path and that our projection will be realised as it is.

Q: Could March be too soon for the ECB to move on a formal basis to a different approach?

A: I don't think there will be a formal move to a different approach. We're not going back to the forward guidance, in any case.