ECB tries to spin silver lining in Eurozone slowdown

The tendency is beneficial, as weaker economic growth could help disinflation, policymaker Boris Vujcic claims

The European Central Bank expects the current slowdown in the Eurozone economy to help bring down inflation in the region, ECB’s Governing Council member and head of Croatia’s central bank, Boris Vujcic, told the Reuters Global Markets Forum on Friday.

Vujcic acknowledged that growth is weaker than the regulator had projected, recorded at 0.3% in the second quarter.

“If the economy slows down significantly faster, that will certainly then bring inflation down faster,” the ECB policymaker said, adding that this could allow the regulator to cut rates “either sooner or more aggressively” and end its toughest ever monetary-tightening campaign which saw borrowing costs jump to the current 3.75% from -0.5% a little more than a year ago.

However, Vujcic stated that the cuts will not be possible until the ECB has clear evidence that inflation is on a steady course towards 2%. According to the latest report by the European statistical agency Eurostat, inflation in the euro area remained unchanged in August from the previous month at 5.3%, more than twice the target rate.

Vujcic also noted that the resilient labor market is still producing quick wage growth, which creates a risk of continued price spikes.

“Wage pressures are still there and from the recent data we don't see them coming down in a significant way. As long as it is like that, I'm afraid that the last mile [of disinflation] will be very difficult.”

The policymaker also warned that the price growth could stall above the target, which would force the ECB to implement more rate hikes.

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“We are reaching the terminal rate although as we say we don't know where it is. Nor will we know in September; we will not know probably in October or November where the terminal rate is,” he predicted.

Markets, however, are less cautious, encouraged by the drop in core inflation, which excludes energy and unprocessed food. The indicator, which is seen as a bellwether for inflation developments, fell to 6.2% from 6.6% in July. Experts polled by Reuters predict that the ECB will keep rates unchanged at its next meeting later this month and through the end of the year, with cuts expected in mid-2024.

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