On Friday, Boris Vujcic, the head of Croatia’s central bank, and a member of the Governing Council of the European Central Bank said that he expects the current slowdown in the economy of the Eurozone will help to rein in the spiraling inflation which has been fueling a persistent cost of living crisis over the last few months.
He acknowledges that current growth rates are lower than had been projected by the regulator, coming in at 0.3% for the second quarter.
He said, “If the economy slows down significantly faster, that will certainly then bring inflation down faster,” adding that if this happens, it may allow rates to be cut “either sooner or more aggressively,” bringing to a close the toughest monetary tightening campaign in the history of the regulator, which had seen borrowing costs surge from -0.5% just over one year ago, to the current 3.75%.
He added though, that cutting interest rates will not happen until the ECB sees clear evidence that inflation is on a firm path toward the 2% target rate of the regulator. The latest report from European statistical agency Eurostat registered inflation in the euro area at 5.3%, which was unchanged from the previous month, at more than double the central bank’s target rate.
Vujcic also pointed out that the labor market continues to prove resilient in the face of interest rate hikes, and that the continued wage growth is posing a risk of continued price spikes.
He said, “Wage pressures are still there and from the recent data we don’t see them coming down in a significant way. As long as it is like that, I’m afraid that the last mile [of disinflation] will be very difficult.”
Vujcic also warned that if inflation were to stall above the target rate, the ECB could be forced to implement still more interest rate increases.
However he predicted, “We are reaching the terminal rate although as we say we don’t know where it is. Nor will we know in September; we will not know probably in October or November where the terminal rate is.”
Markets have proven more optimistic however, buoyed by the fall in core inflation, which excludes volatile energy and food prices. The measure, which is seen as a superior reading of the overall direction inflation is heading, fell from 6.6% in July to 6.2% in August.
A poll of experts by the Reuters news service predicted that the ECB will leave rates be at their next meeting later in the month, and through the end of the year, with mid-2024 seeing the beginning of interest rate cuts.
