Boris Vujcic, a governing council member of the European Central Bank (ECB), has indicated that a cut in the interest rate set for September would be dependent on the ECB’s inflation forecast showing an improvement. He suggested that an interest rate reduction may not take place if there is a delay in achieving the inflationary target set by the ECB.
He stated, “Any prolongation of the inflation conversion toward the mid-term target weakens the argument for a cut in the interest rate.” However, he made clear that there is still data to evaluate before that decision can be made, especially since updated forecasts will be available by then.
This statement came after the ECB reduced rates by 0.25 points earlier in June, nine months post its last increase. This decision was based on predictions indicating a slightly accelerated inflation for this and the following year, in conjunction with an extended path to reach a 2% inflation.
Vujcic further added that more data will be released by September including three more inflation readings and other financial-market data, which will factor into their decision regarding whether to hold off or reduce the interest rate.
Along similar lines, Vujcic’s Latvian colleague, Martins Kazakhs, warned that it’s crucial not to allow inflation to exceed 2 per cent beyond 2026. The ECB is aiming to achieve this target by the final quarter of the following year.
Other officials also called for caution, including Portugal’s Mario Centeno, who pointed out that data-based decisions are crucial as inflation is expected to remain stable until August. Bostjan Vasle of Slovenia concurred that the speed of rate reductions will not match the pace at which they were increased.
Vujcic concluded, noting that although the ECB’s mainstream forecast shows inflation moving towards the target, authorities should particularly monitor services.
The speaker noted that the less exchangeable and wage-dependent sectors of the economy make it challenging to reduce inflation. Additionally, robust demand for services prompts a consideration about a persisting shift in consumer preferences in favour of services over products. As it stands, this ongoing trend remains unexplained, but will presumably be resolved eventually.
He then articulated that the potential threats towards inflation’s future – whilst still present – are more evenly distributed than in the past. The speaker also cautioned that a swift reduction in inflation rates appears unlikely, given that it chiefly relies on goods. The continued growth in services presents a potential hazard, however, it’s expected to taper off progressively throughout the remaining part of the year, as reported by Bloomberg.