By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Boris Vujčić on Tuesday said the ECB had to remain “very agile and vigilant” as the Iran war pushed the euro area closer to stagflation risk, while making clear that policymakers would soon know whether higher interest rates were needed.

Vujčić, who heads the Croatian National Bank and is due to become ECB vice president in June, told Bloomberg that the euro area was not yet in stagflation, but that “the risk is moving into the direction of stagflation.”

With the next policy decision still some way off, he resisted locking himself into a firm rate view. “It’s a long time in today’s world until April,” he said. “There’ll be a lot of new data and news” and “in such situations, everything is live.”

For now, Vujčić suggested that caution still had value, saying “the option value of waiting a bit is high” even though the economy was already moving away from the baseline and toward worse-case scenarios.

At the same time, he signaled that tightening remained a live possibility if the shock proved persistent. “It’s better to start with a smaller move and then follow what’s going on,” he said, adding that policymakers would soon know “whether we will have to act or not.”

Vujčić also played down the growth cost of limited tightening, saying, “I don’t think that one or two hikes would do much harm to the economy.” Still, he stopped well short of advocating such a move, adding that “you have to ask yourself whether they’re needed or not, because some would also argue that one or two cuts wouldn’t do too much good to the economy.”

A de-escalation in the conflict would materially reduce the case for tighter policy, in his view. An opening of the Strait of Hormuz “would definitely lower the pressure on inflation and therefore the possibility of [an] interest rate hike,” he said.

If the ECB were instead confronted with a longer war bringing both higher prices and weaker growth, Vujčić argued that the policy priority would still be clear. “Our mandate is very clear — it’s a single mandate of price stability,” he said, adding that the ECB would have to “keep inflation down at 2%.”

He also drew a distinction with the 2022 inflation shock after Russia’s invasion of Ukraine, saying the risk of second-round effects was smaller this time. Still, he said the ECB had “learned our lessons from 2022” and now explicitly recognized in its monetary policy strategy that supply shocks could warrant a response if they were not short-lived.