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ECB must keep raising rates despite public sacrifices, says Vujcic

Balazs Koranyi

ZAGREB (Reuters) – The European Central Bank needs to keep raising rates beyond March and must keep rates high for some time even as inflation falls, This “sacrifice” has become more difficult to explain to the public, the latest ECB policymakers say.

After raising interest rates by 3 percentage points since July, policymakers are starting to think about Europe’s When and where the fastest tightening cycle in central bank history ends, especially now that inflation is retreating rapidly from record highs.

But Croatian Central Bank Governor Boris Vujcic (his country (which joined the euro zone on January 1) said stubborn underlying inflation meant it was too early to predict the end of rate hikes and rate cuts to be priced in let alone the end of the year.

“We may end up at Seeing more interest rate action after March, I will leave the question of the final rate for later,” Vujcic, a career economist, university professor and past decade as Croatian central bank governor, told Reuters.

“Then typically you keep rates on hold for a while until you’re confident that inflation is back where you want it to be,” he said in an interview.

Like the great Like most governors seen as a policy hawk, 58 year-old Vujcic has spent most of the

ECB meetings, his One and a half years left in term.

Vujcic said that with energy prices falling sharply from 2022 highs and supply chain constraints easing, the ECB may lowered its inflation forecasts this month.

He added that price growth was likely to fall back to the ECB’s 2% target faster than now expected.

Chart: Eurozone Inflation Expectations –

Nevertheless, the Croats believe that this does not mean that the work of the ECB is done.

“Due to various factors, headline inflation is likely to fall to 2% earlier than expected … (this) brings headline inflation down significantly below core inflation,” Vujcic said.

But Europe The central bank needs to see a sustained decline in underlying inflation, which strips out volatile food and energy prices, as this figure is a more reliable indicator of underlying price pressures and the effectiveness of monetary policy.

NBN Governor Klaas Knot also warned Headline inflation is likely to be below underlying prices, the report said.

This is because lower natural gas prices will drag headline interest rates down quickly, while core inflation has been surprisingly stubborn past inflation vs. prices due to a range of factors from around the world wheel impact.

CHART: Race to Hike –

The problem is that while the public tends to focus on headline inflation, the ECB must also focus on underlying prices given that the final stages of cutting inflation may be the most difficult.

“In this case, monetary policy has to be tight enough to push core inflation down, which is not an easy task as it may imply a relatively high sacrifice rate,” Vujcic said .

Economists call the sacrifice rate the loss incurred to reduce the long-run rate of inflation.

When inflation retreats from high levels, it tends to be lower, usually with the “last mile” of deflation increasing as price growth approaches target.

“If headline inflation has come down, we will have to explain to the public why we maintain a restrictive monetary policy stance,” Hu Zhe said.

In one possible piece of good news for the ECB, the economy appears to have avoided the worst recession yet, with prospects for a soft landing improving.

Click here to view an excerpt from this interview.



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