Governor Boris Vujčić spoke with MNI journalist Luke Heighton. The interview was published on October 9, 2024

Core inflation remains key to determining the European Central Bank’s interest rate path, National Bank of Croatia governor Boris Vujčić told MNI ahead of a widely-anticipated cut next week, adding that inflation looks unlikely to dip below the 2% target next year.

While softer-than-expected inflation and a softening real economy have built expectations of an October cut, September data was affected by falls in energy prices that are already reversing, Vujčić said in an interview in which he preferred not to anticipate next week’s decision.

"Upside risks at the moment are primarily geopolitical – which recently rose with the events in the Middle East – but also a continued question of what happens with services inflation. In other words, how quickly will core inflation move down?" he said. "At the moment the risks of undershooting the 2% target next year are not high. That might change, of course. But these risks appeared more pronounced a little while ago when energy price declines, if they continued at faster pace than we expected, could have resulted in undershooting the target in 2025."

December’s meeting will be fully open and not dependent on what happens in October, Vujčić said, with incoming data and fresh macroeconomic projections dominating the decision-making process.

Vujčić, regarded as a hawk, said that he had greater confidence in recent projections which see inflation trending towards target over the course of next year, after a period when the projections were called into question.

"Thinking about 2025 I see somewhat more risk to our projections from the productivity growth forecast than from the assumption of slowing wage pressures. Most of the catch-up of wages has already happened, some will still happen, but overall wage pressure should slow down. Missing productivity growth concerns me more", he said. Market expectations of inflation settling below the 2% target in 2025 - especially those extracted from inflation-linked swaps affected by volatile oil prices - along with estimations of both the neutral and terminal rates, should be approached with care, he said.

"We have the luxury not to have to forecast the terminal rate and a speed of getting there; markets don't have that luxury ... Our projections are more driven by a large number of cyclical and more structural factors", he said.

"We don’t know where the terminal rate will be, and I would be very cautious in trying to forecast it. Some people tried to do that on the way up, and it didn’t work out well."

For now the ECB should continue its meeting-by-meeting approach rather than give longer-term forward guidance, Vujčić said.

"When you listen to the ECB policymakers in reality it's always some sort of a mixture between 'short-term soft forward guidance' and the meeting-by-meeting approach. Different people send a bit different signals. Before, however, there was, I would say, an institutional form of forward guidance used as a monetary policy instrument, and that is now behind us. We decided that it's better to have a meeting-by-meeting approach, and for the time being I don't see any reason to change that." Vujčić noted that the impacts of both monetary tightening and easing have so far been in line with expectations - with some of the effects of tighter policy still to work their way through the economy even as financial conditions ease in anticipation of rate cuts.

While easing global monetary conditions will help the eurozone, they will also benefit competitors such as China, he noted, adding that Germany’s economy is the weakest part of the European puzzle.

At current levels of rates, Federal Reserve policy has less bearing on the ECB, he said.

For the moment, Vujčić said it would be appropriate for the ECB to continue easing policy in 25bp increments.

"I don't see any good reason to contemplate larger cuts than we have made already", he said. "We've started in time, we're moving gradually, as we planned, and this is the best way to continue, with the 25bp cuts."