Vujčić: Monetary policy must be sufficiently restrictive to lower inflation

The Governor of the Croatian National Bank (HNB) Boris Vujčić, who is also a member of the ECB Governing Council, stated to Reuters that monetary policy must be sufficiently restrictive to lower core inflation, and that there will likely be ‘more activity’ regarding interest rates in the eurozone after March, but that data will be awaited and decisions will be made in May, June, and July.

The European Central Bank (ECB) raised interest rates again at the beginning of February by half a percentage point, stating that it still plans to curb inflation in the eurozone by restraining demand, despite a slowdown in economic growth.

The ECB announced that it will raise interest rates again by half a percentage point at the meeting in March, and when asked by journalists whether further interest rate increases should be expected after March, Vujčić said it is likely that ‘more activity’ regarding rates will be seen after March.

– However, we will wait for the data to arrive and then we will decide what to do in May, June, and July – said Vujčić, who became a member of the ECB Governing Council with Croatia’s entry into the eurozone.

When asked whether the policy of raising interest rates could be expected to end by summer, Vujčić said that this cannot be predetermined ‘calendarly’, and he also stated that he does not want to talk about the prospect of lowering interest rates at a time when we are still in the process of raising them.

In order to say that the ECB’s policy is functioning, there must be a continuous decline in core inflation, Vujčić emphasized, adding that it is clear that core inflation is still too high.

The ECB could revise its overall inflation forecast in March

When asked by journalists when this could happen, Vujčić said that the first data on inflation for January, which show lower inflationary pressures than expected, a stronger euro, and new futures contracts for energy, goods, and food, indicate that there could be a downward revision of the overall inflation forecast in March.

He also stated that the reopening of China poses a risk, but there are also many large, energy-intensive companies that have reduced or halted production because energy prices were above profitability levels.

– Prices have recorded a sharp decline, so they can be reopened, and this could, in a way, to some extent, act as an automatic price stabilizer – assessed Vujčić, who also cited the example of Kutina’s Petrokemija, which he claimed accounts for 25 percent of total gas consumption in Croatia.

– They are now closed, but with lower gas prices, they may restart production – he said.

A decline in core inflation could imply a high sacrifice

Vujčić believes that overall inflation has peaked.

– I believe that is the case; I already stated in November that I am not worried about further inflation growth, but rather its persistence – he said.

He stated that monetary policy must be sufficiently restrictive to push core inflation ‘downward’.

– This is not an easy task as it could imply relatively high sacrifices – emphasized Vujčić.

However, on the other hand, he said, there is a possibility that overall inflation could fall to the targeted two percent much earlier than expected, due to various factors affecting the supply side (…) which could sharply reduce overall inflation below core inflation.

– In that case, the task of monetary policymakers would also be difficult, but in a different sense. We would have to explain to the public why we maintain a restrictive monetary policy if overall inflation has already fallen – Vujčić explained.

The entire process of slowing inflation can be more or less challenging, said the HNB governor, assessing that the European economy is now in a better position than it was two or three months ago, partly due to a mild winter, falling energy prices, and reduced supply ‘bottlenecks’.

Croatia’s experience is not different from other countries

When asked about ‘anecdotal evidence’ of one-time inflation that occurred with Croatia’s entry into the eurozone, when the business sector ‘adjusted’ prices, Vujčić said that this indeed happened, but he does not consider it a problem.

– Our experience is not different from other countries when they introduced the euro – he stated, adding that the inflation data for January showed that there was some impact of the euro introduction on prices, especially in services.

– But this was expected and was not large, probably around 0.3 to 0.4 percentage points, one-time. This is largely in line with findings in all other countries that have introduced the euro – Vujčić stated in an interview with Reuters on Friday, adding that Vujčić, like most governors from the ‘former communist eastern Europe’, is viewed as a ‘hawk’, which implies that he has a tougher approach to monetary policy.