(Bloomberg) -- The European Central Bank probably has room to slowly lower interest rates as inflation converges toward 2%, but risks remain and officials must proceed carefully, according to Governing Council member Boris Vujcic.
“As long as data fall in line with our projections which foresee inflation to fall to 2% in 2025, that increases our confidence that we can gradually ease the restrictiveness of our monetary policy,” the Croatian central-bank chief said in an interview. “But we should remain cautious and move very gradually.”
Speaking on the sidelines of the Federal Reserve’s annual conference in Jackson Hole, Vujcic signaled a rate reduction in September — widely expected by investors — is possible.
“There is still some data to come between now and the next meeting,” he said. “But so far we have not seen any major surprises in the data in terms of our expectations or forecasts.”
After the ECB’s landmark cut in June, next month’s policy meeting will determine whether officials consider inflation to be moderating sufficiently to allow a second reduction and possibly more afterward. Price growth unexpectedly ticked higher in July, to 2.6%, while at the same time there are signs the economy is faltering.
Vujcic said inflation is evolving “more or less in line with our projections,” and that “the uncertainty around the inflation outlook has decreased a little bit, also with the newest wage data.”
Growth in negotiated pay slowed significantly in the second quarter — to 3.6% from 4.7% — data published on Thursday showed. “This is very good news,” Vujcic said. “The catch-up in wages for the inflation shock may have already peaked.”
He stressed, however, that “this doesn’t mean that all uncertainty has disappeared,” referring in particular to sticky services inflation, which is hovering around 4%. “Companies in the services sector still have some pricing power, as we can see from the inflation momentum after the base effects have gone away.”
Vujcic also highlighted “still weak” productivity. “We expect it to pick up to reduce unit labor costs, but so far this is not happening,” he said. “This is the big uncertainty in our wages-profits-productivity nexus.”
Recent productivity data was softer than expected and added to growing skepticism that the ECB’s view might be too optimistic.
Vujcic downplayed concerns about the euro-area economy. “Growth in the second quarter was broadly in line with our projections,” he said. “Survey indicators for the third quarter point to weaker growth than expected, but not very far from our projections.”
“There is no reason to be overly worried — I don’t see a risk of a recession at the moment,” Vujcic said.
In his view, many of the economy’s struggles are down to “structural, not cyclical” factors — especially in the manufacturing sector. This “can’t be impacted significantly by macroeconomic policies — be it monetary or fiscal policy,” he said. “From what I see happening now in the euro-zone manufacturing sector, it does not seem that interest-rate cuts will solve our growth problem.”
Vujcic declined to comment explicitly on market expectations for two to three more rate cuts in 2024. But he said that “I would think that decisions will be made around the projections, which tells you also something about how I would expect it to evolve.” The latest forecasts were based on market assumptions for two more rate reductions this year.
Referring to the recent strength of the euro against the dollar, Vujcic repeated that the ECB doesn’t target a specific exchange rate. “However appreciation in itself helps to dampen inflation,” he said. “But so far it has not much of an impact.”
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