Central Bank should avoid excessive responses if inflation slightly dips below 2%, according to Vujcic's opinion.
No More Panic: ECB's Take on Inflation Fluctuations
Don't worry your head off about inflation dipping below the European Central Bank's (ECB) 2% target. That's the word from ECB policymaker Boris Vujcic. He told Reuters that there's no need for an overreaction; inflation will bounce back.
The ECB cut interest rates last week, marking the eighth time in a year, but they signaled a policy pause for next month, even projecting inflation at just 1.6% next year. The eurozone inflation was 1.9% in May, according to a recent report.
Vujcic, who's also Croatia's central bank governor, believes price growth will rebound and that monetary policy should avoid "precision surgery" on minor fluctuations from the goal. In his words: "A few tens of basis points' deviation on either side of the target is not a problem."
So why shouldn't we worry? Vujcic expects inflation to edge back up as energy prices stabilize and the economy picks up steam. Euro strength isn't likely to have a big impact on prices unless it lasts for several quarters, Vujcic said.
While some ECB policymakers, such as Portugal's central bank governor Mario Centeno, fret about euro-zone inflation possibly slowing too much, Vujcic sees the risks as balanced. However, he warns about the uncertainty surrounding global trade tensions with the U.S. President Donald Trump's administration.
Looking Ahead: ECB's Strategy Refresh
Vujcic reminds us of advice he got from former Federal Reserve Chair Alan Greenspan: a high rate of inflation is more dangerous than a low one. Greenspan cited two decades of relatively benign deflation in the late 19th century, which was partly due to improvements in productivity, Vujcic said.
The ECB is currently reviewing its long-term monetary policy strategy. This includes the role of massive bond purchases, or quantitative easing, in resuscitating inflation when it's too low. The ECB has pumped around 7 trillion euros of liquidity into the economy through QE and other measures over the last decade. Critics argue these schemes have caused bubbles in real estate and set the central bank up for substantial losses.
However, Vujcic thinks that the next time around, people will be more mindful of these lessons, and the bar for QE would likely be higher. QE can help stabilize dysfunctional markets, like during the 2008 financial crisis and the COVID-19 pandemic, but if used "for years to try and bring inflation up, its marginal efficiency declines."
Some ECB policymakers are contemplating self-criticism, but sources suggest these reflections may not make it into the ECB's new strategy document, scheduled for release this summer.
News about the European Central Bank (ECB) suggests that policymaker Boris Vujcic expects inflation to rise, easing concerns about it dipping below the 2% target. Despite concerns from some ECB members about possible slowing of inflation, Vujcic believes that the next time around, the bar for quantitative easing, a real estate and finance sector influencer, would likely be higher.
