Vujčić: Wage Pressure in the Eurozone Poses Inflation Risk

Weaker economic activity growth in the eurozone could slow inflation more quickly, but wages continue to rise strongly due to a resilient labor market, creating the risk of renewed price acceleration, said the Governor of the Croatian National Bank Boris Vujčić, on Friday.

The ECB is discussing a possible pause in the interest rate hike cycle after an unprecedented prolonged period of tightening monetary policy, Reuters notes.

Bank officials are closely examining inflation data to determine whether their actions are sufficient.

At the Reuters Global Markets Forum, Vujčić, a member of the ECB’s governing council, did not want to say how he would vote at the meeting in mid-September, emphasizing that the bank would only be able to reliably determine in a few months whether interest rates have peaked.

– We are reaching the targeted level (of interest rates), while simultaneously saying that we do not know what it is. We will not know this in September, and probably not in October or November either. It may only be possible to reliably say next spring that inflation will return to the targeted two percent. Wage pressure is still present, and we believe it will not significantly weaken, judging by the data released recently. As long as the situation remains as it is, I fear that the final stage (of disinflation)… will be very difficult – explained Vujčić.

In August, prices in the eurozone rose by 5.3 percent, according to the first estimate from the European statistics office released on Thursday.

Markets are convinced that the ECB will keep interest rates at the current level in September. The chances of raising them again by the end of the year are estimated at 50-50, and they will lower them in the middle of next year.

Vujčić, however, warns that the easing of inflation may not be linear and cautions about the risk that the inflation rate may stall above the target level, which would force the ECB to begin tightening monetary policy again.

He acknowledges that the eurozone economy is growing weaker than the ECB had forecast, which could even help in curbing price growth. However, in his interpretation, the economy is not actually shrinking but stagnating.

– If the economy slows down significantly more, it will certainly slow inflation more quickly. In that case, the central bank could, of course, lower interest rates significantly or in a shorter time frame. However, this should not be expected until the ECB receives clear evidence that the inflation rate is continuously declining towards two percent and that real interest rates are well into positive territory, said the governor.