In a panel discussion held in Skopje today, opinions about the future of interest rates and inflation were aired by two members of ECB’s Governing Council.

Bostjan Vasle suggested that the series of interest rate hikes might have come to an end, citing a possible easing of inflation. Boris Vujcic, on the other hand, shared a more cautious perspective, highlighting potential challenges in attaining the 2% inflation target.

Vasle, Slovenia’s central bank head, was quoted saying, “It’s probably the case that we are done with interest-rate increases.” He noted that current economic indicators appear favorable, with preliminary signs of inflation tapering off.

However, Vasle also pointed out the prevailing uncertainties, stating, “We are seeing some signs of inflation going down, also some first signs of sustainability of this trends, but on the other hand, there are still many uncertainties.”

Croatian central bank chief Vujcic, acknowledged the downward movement towards the 2% goal but pointed out the statistical effects that may be influencing these figures. His words served as a reminder of the monetary policy challenges that could arise if the disinflation process stalls before reaching the target.

“You might get into a situation where the inflation rate — the disinflation process — stops at a level, which is not your target,” Vujcic expressed. “Then it’s challenging for monetary policy, because it has to do something more to bring it all the way down to 2%.”

In a newspaper interview published on Sunday, ECB Governing Council member Pablo Hernandez de Cos spotlighted the upcoming economic projections in March as a crucial factor in determining the timing for interest rate cuts.

De Cos outlined two primary considerations that the March projections will address: the confidence level in achieving ECB’s 2% medium-term inflation target and the determination of an interest rate path that aligns with reaching this symmetric target.

Reflecting on past challenges, de Cos acknowledged the ECB’s initial underestimation of the inflationary surge post-pandemic and following Russia’s invasion of Ukraine.
However, he noted a marked improvement in the accuracy of staff projections, highlighting recent instances where inflation figures came in slightly below expectations.

De Cos’s remarks suggest a positive outlook on Eurozone’s disinflation process, describing it as “well advanced” and likely “to continue in the coming quarters.”

ECB Governing Council member Ewald Nowotny complained that “in past years we perhaps followed markets’ expectations too intensively and avoided disappointing them.” He emphasized “central banks should be the decisive institution and must therefore sometimes disappoint markets.”

On inflation targeting, Nowotny favors aiming for 2% plus or minus one percentage point. And, it means that inflation of 1.6% is also within the target area and therefore requires no monetary policy measures”. However, he said “Draghi by contrast interprets ‘symmetry’ in such a way that lower interest rates are in place for a longer period: ‘lower for longer’ is the slogan here. I actually consider that to be a problematic signal.”