ECB to keep raising interest rates, says Croatian Central Bank governor –

The European Central Bank (ECB) will continue to raise interest rates this year based on inflationary pressures and the impact of previous rate hikes, the central bank governor of new eurozone member Croatia told EURACTIV in an exclusive interview. .

“We are in a period of rate hikes, and this cycle did not end with the last 50 basis point increase, but it will continue. How long will depend on what inflation will be and the impact of previous increases that will be evaluated from one monetary policy meeting to the next.”Governor Boris Vujčić explained.

Croatia became the 20th member of the Eurozone on January 1. Mr Vujčić, who has been vice-governor and later governor of the Croatian Central Bank since 2000, will now sit on the ECB’s board, which is responsible for setting interest rates.

He refused to align himself with a particular line within the ECB, but indicated that he would be inclined to support measures he deemed necessary.

“As I have done for the past 23 years, I try to be a reasonable decision maker […] and I will continue. I don’t like to sweep dust under the rug. When I see problems, I try to solve them. »

Internal causes of inflation

This monetary policy veteran noted that the inflation seen in Europe in 2022 is not only due to external factors, namely Russia’s aggression in Ukraine and the resulting energy crisis, but is also the result of a combination of both supply and inflation. demand pressures.

“An important part [de l’inflation] it was a legacy of what was done during the pandemic, when monetary and fiscal policies were exceptionally expansionary, thereby neutralizing the shock of the lockdowns. »

After the lockdowns were lifted, the economy and demand quickly recovered, “Because people saved money during the pandemic and wages were not affected much, while supply did not recover quickly enough, which led to increased price pressures.”Vujčić explains.

“What we can learn from this episode is that inflation is a combination of external factors, namely supply shocks, but also demand factors resulting from a combination of monetary policy and exceptionally expansionary fiscal policies in the previous period. What central banks need to do is act to prevent so-called “second-cycle” effects. »

“When inflation reaches higher levels, we need to act to prevent it from becoming embedded in inflation expectations, which will complicate efforts to reduce inflation to 2%.” he added.

An unrealistic euro zone fiscal department in the short term

Efforts to implement a common fiscal policy continue to stall, despite a clear monetary mandate for the eurozone, as they are only intermittent.

The second best solution in the medium and long term would be convergence of the current 20 fiscal policies to the common denominator, convergence of the ratio of public debt to GDP, so that countries adhere to a harmonious budget orientation. . This is where coordination really comes in handy.»

Referring to the case of some Member States that still do not want to join the euro zone, such as Poland, the Czech Republic or Hungary, the Governor believes that this “It is largely the result of political decisions”. Croatia, for its part, with its strongly euroized economy,“should have won more”.

Very well, each country can decide what they want on their side […]. But it is difficult to imagine that a completely independent monetary policy can be possible when it is so close and connected to the world’s second largest monetary zone.[la zone euro]“he said.

Advantages of the euro zone for Croatia

According to Boris Vujčić, Croatia will benefit from joining the euro because “it will be more resistant to crises, less exposed to exchange rate risk and more attractive for investments“.

We can see this now when we compare it to the situation during the crisis of 2009 and the Eurozone debt crisis.Croatian also pointed out that there were no speculative attacks on currencies this time and spreads on government bonds did not widen much compared to the benchmark German bond yield.

Mr. Vujčić also believes that Croatian banks are very well capitalized with a return on equity of 13% in the first nine months and have significant excess liquidity and will start receiving interest from the ECB from this year.

The ECB raised the interest rate it pays on bank deposits by 75 basis points to 1.5% in October, the highest since 2009, and rose to 2% in December.

At the same time, Croatian banks, mainly owned by Italian and Austrian parent companies, had a one-time cost of 900 million kunas (about 132 million euros) for IT preparation for the euro changeover in 2022.

They will also lose income from hard currency transactions, most of which are in euros and amount to about 200 million euros a year.“he said.

But on the plus side, the very high exchange rate risk has disappeared due to the fact that almost 50% of deposits are in euros and loans are linked to euros. In addition, mandatory reserves increased by 9%. [du bilan de la banque] to 1%, while the requirement for banks to hold at least 17% of fully liquid foreign exchange assets is now nil.»

Reserve requirements are funds that banks are required to keep as reserves in their current accounts with their national central bank.

Vujčić said public support for the single currency would grow, despite some price increases due to the upward rounding of euro prices that angered many Croats in early January.

In our last poll, 65% supported the euro, and experience shows that after the adoption of the euro, support increases when people see that prices have not risen as much as they feared.»

[Édité par Anne-Sophie Gayet]

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