On Wednesday, comments made by Borislav Vujicic, a member of the European Central Bank's (ECB) governing council and the head of the Croatian National Bank, stirred significant discussion around the ECB's potential actions in the futureHe opined that irrespective of the Federal Reserve’s decision to slow its interest rate cuts, the ECB might still implement three rate cuts this yearHowever, this accommodative approach is contingent upon a precipitous fall in core inflation.

Beginning last June, the ECB embarked on a trajectory of interest rate adjustments, having lowered borrowing costs five times thus far while signaling towards further policy relaxationThese moves have ignited a whirlwind of speculation among investors, questioning the pace and extent of future rate cutsIn an interview, Vujicic stated, “The market anticipates three more cuts this year, and those expectations are not unreasonable.” Nevertheless, he underscored that forthcoming months' data would play a decisive role

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Analysts believe service sector inflation is likely to decline significantly, a vital component of total consumer price inflation that has been a key driver of price increases over the past yearVujicic emphasized, “For these cuts to materialize, we need to see core inflation and service inflation moderating.” This indicates the ECB's acute dependency on inflation data when formulating its monetary policy; only if these inflation figures meet expectations will further rate cuts be contemplated.

Conversely, the outlook for rate cuts by the Federal Reserve has become increasingly ambiguousLast month, the Fed conveyed that it was in no rush to ease monetary policy, and unexpected high inflation data from the U.S. in January bolstered the potential that they may refrain from cutting rates until 2025. Faced with this scenario, Vujicic was quick to distance himself, asserting that even if the Fed remains stagnant, the ECB could persist with its own rate cutsHe pointed out that elevated U.S. interest rates have strengthened the dollar, which raises long-term borrowing costs; however, he noted that to date, market trends have not triggered excessive concernHe remarked, “Exchange rates are a consideration for us, but at current levels, it is not something we need to worry about.” This suggests that while the ECB monitors exchange rates as an external factor in decision-making, the prevailing exchange rate levels do not currently pose a significant obstacle to its rate cut decisions.

Vujicic also mentioned that the ECB should not guide investors regarding how far rates will dropNonetheless, he foresees that debates over the eventual rate will soon intensify, and there is a possibility that the ECB may alter its wording during the March meeting

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At present, the ECB describes its policy stance as “restrictive,” but after another rate cut, the deposit rate would fall to 2.5%. Some policymakers might begin questioning whether such a rate is still sufficiently high to dampen economic growthVujicic articulated, “We are getting close to discussing when we should remove the term ‘restrictive’ from our wordingThis might happen at our next meeting, but it will also depend on the upcoming data.” He further added, “When you can no longer say with complete confidence that you are still in the restrictive zone, it is time to do so.” This illustrates the ECB’s commitment to a cautious and flexible approach in adjusting its monetary policy, tightly linked to economic data fluctuations.

In terms of economic outlook, Vujicic expressed that “the risk of recession is low,” yet he simultaneously noted that rapidly visible signs of recovery would not emerge in the short termThis viewpoint reflects the current state of the European economy, which is precariously balanced neither in imminent recession nor possessing robust growth momentumThe ECB’s adjustments in monetary policy are occurring within this nuanced economic environmentWhile rate cuts may spur economic growth, inadequate control of inflation risks producing a cascade of negative effectsThus, the ECB finds itself needing to strike a balance between stimulating the economy and controlling inflation.

Currently, the direction of the ECB’s monetary policy resembles a ship navigating through fog, rife with uncertaintyEach decision taken has profound implications, influenced by an array of factors including inflation data, exchange rate fluctuations, and economic growth

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