Boris Vujčić: Interview with Reuters

18 September 2026

We are speaking less than a week after the ECB’s latest projections were published, and energy prices have already moved well above the baseline. How does this affect your outlook for inflation and growth?

Energy prices have continued to increase, and that was already evident during the Governing Council meeting compared with the cut-off date for the projections. This is also reflected in financial markets: the pricing of the interest rate path is being driven mainly by rising energy prices. In the absence of forward guidance, energy prices have become a focal point for market expectations regarding inflation, the rate path and the terminal rate.

There is a notable change compared with June and the pre-summer period. The expectation now is that energy prices will stay elevated for longer, whereas previously the baseline expectation was that tensions in the Middle East would ease and energy prices would adjust downwards. There remains a great deal of uncertainty, driven predominantly by geopolitics. We will see what happens and react based on incoming data, meeting by meeting.

Do you believe financial markets have become too fixated on energy prices in pricing future rate hikes?

We have made it clear that we do not provide forward guidance and that we act on a meeting-by-meeting basis. What I want to emphasise is that we do not look solely at energy prices, but at a much broader set of data and criteria when making monetary policy decisions. It would not be advisable to focus exclusively on energy prices, however important they are.

Markets are pricing in several rate hikes over the next 12 months. Do you think that is justified?

Markets do what they have to do. They have to price assets. Lately we have seen very high sensitivity to energy prices. But one must remember the broader economic relationships. If inflation remains high through the autumn and affects household incomes and consumer behaviour, that will also have a dampening impact on GDP. One has to keep everything in mind and not focus on a single set of data.

Gas storage levels in Europe are relatively low heading into the winter. How significant is the risk of a natural gas shock compared with oil price fluctuations?

Both oil and gas affect inflation, but in different ways. Oil has a more immediate pass-through, feeding directly and rapidly into headline inflation via fuel prices. Gas has a more persistent and long-lasting impact, directly through household utility bills and indirectly through input costs for producers.

Gas storage levels are lower than in the past, but gas is also somewhat less critical as a marginal driver of electricity prices than it was previously. Europe has adapted by expanding renewable capacity by about 15-20% over recent years and by investing heavily in energy efficiency across buildings and industrial facilities. Renewables now account for 26% of final energy consumption and 50% of electricity consumption.

If prices remain at these levels, the important question is what the winter will look like. A harsh winter will have a larger negative impact on GDP and real incomes than a mild one. If you consult climate scientists on whether El Niño makes a mild winter in Europe more likely, considerable uncertainty still remains, as neither economists nor climatologists are perfect forecasters.

Given weather disruptions and El Niño, what is your outlook for food inflation?

We are looking very closely at food inflation. But the net effect of El Niño globally is complex, as it can harm agricultural output in some regions while benefiting others.

In our baseline projections, we anticipate food inflation will increase gradually, peaking at 3.4% in the third quarter of 2027. This, in part, also reflects the lagged pass-through of the severe droughts experienced across Europe this summer. It takes time for agricultural shocks to filter through the supply chain into retail prices.

The euro area economy has proven resilient so far. When do you expect higher interest rates and energy costs to weigh more heavily on activity?

The tightening so far has been absorbed well by the economy.

This is not especially surprising, given the level of tightening, but it does show resilience both to policy tightening and to geopolitical shocks.

Monetary transmission is a gradual process, but it is already clearly taking place. Lending rates for mortgages and corporate loans are higher than at the beginning of the year, as well as bank funding costs driven in part by higher bond yields.

What is driving that resilience – is it structural adaptation, or temporary factors like frontloaded exports?

It is a combination of factors. The two main components supporting growth have been exports – where there was likely some frontloading – and private consumption, which was stronger than we had forecast.

Previously, we had anticipated a pick-up in consumption that failed to materialise – and in the latest data, it emerged. That may have been supported by inflation temporarily dipping lower. We expect underlying consumer spending to remain reasonably solid, provided persistently higher prices do not erode real purchasing power.

Does uncertainty argue for a gradual approach to tightening?

That’s what we have been doing so far. We had two rate increases at projection meetings. We will see what happens in the coming months and adjust policy accordingly.

Is there value in maintaining that pace?

For the time being, yes. But we will see what tomorrow brings.

Does moving rates above 2.50% place policy into restrictive territory?

I do not like to focus too much on labels such as “neutral” or “restrictive”. We need to assess what level of interest rates is appropriate at a given point in time rather than concentrate on definitions.

Long-term sovereign bond yields have risen notably. Does this complicate monetary policy or pose risks to financial stability?

The rise in bond yields reflects several factors: higher inflation expectations and adjustments to terminal rate pricing, large fiscal deficits and sovereign issuance, and a record corporate bond supply. Global spillover effects, including rate adjustments by other major central banks like the Federal Reserve and the Bank of Japan, also play a role.

So, part of this rise is structural. How these market yields evolve will feed into our assessment of financial conditions and our policy stance. Over time, if inflation expectations come down, we could see a repricing, but responsible fiscal policy by governments remains an essential part of the puzzle in the long run.

Do these bond market movements raise financial stability concerns?

Sovereign bond dynamics and fiscal sustainability are permanent items on our financial stability radar. However, the recent rise in yields does not pose a threat to financial stability.

The banking sector is in a strong position. European banks are well capitalised, highly liquid and profitable, with market valuations improving relative to book value.

However, new financial stability risks are emerging in areas such as AI-related cybersecurity, AI-related operational risks and stretched equity market valuations, particularly in concentrated tech sectors where global spillover effects are inevitable.

Some AI leaders have recently called for caution regarding the rapid deployment of their technology. Do you see AI driving a major productivity leap in the near term?

It is a central question, but nobody has a definitive answer yet as to how AI will affect productivity in the medium to long term. If it delivers sustained annual productivity gains of 4-5%, as some believe, that would be transformative for the entire economy and would require rethinking both monetary and fiscal policy. However, history provides several examples of initial enthusiasm about technological productivity leaps not being fully realised. We must wait and see whether this episode proves to be structurally different.

Let’s turn to another structural shift. How significant is the so-called China 2.0 shock for Europe?

It is gradual, but not as slow as people sometimes think.

I recently visited a Croatian company that produces plastic components for the automotive industry. Before the pandemic, all of its machinery was German-made. At the time, the company told me that Chinese alternatives were cheaper but not good enough.

When I visited again recently, about half of the machines were Chinese. The company said that the quality had caught up while prices remained significantly lower. That illustrates how quickly things can change.

These developments are not entirely new. When other competitors improve productivity and quality, firms have to adapt. They either improve their own productivity, move up the value chain or develop new products and markets.

The ECB is discussing raising minimum reserve requirements, a tool you have used at the central bank of Croatia. Would you be in favour of raising them?

Minimum reserve requirements historically served both prudential and monetary policy purposes.

The prudential role is outdated today because we have a much more sophisticated prudential framework. But they remain a useful monetary policy instrument.

When you create excess liquidity, particularly as large as we did in the past, reserve requirements allow you to sterilise part of it in a simple and inexpensive way. They remain a useful sterilisation tool.

So should they play a larger role at the ECB?

They are particularly useful when excess liquidity is large.

The Eurosystem created substantial excess liquidity through asset purchases. Reserve requirements are one way of absorbing part of that liquidity. It is a simple instrument.

Would you prefer that approach to tiering or charging fees on reserves?

I don’t want to pre-empt discussions with my colleagues, but I have always viewed reserve requirements as a straightforward way to sterilise part of the excess liquidity. I would rather sterilise excess liquidity than charge fees and tiering is quite complicated.

We meet shortly before you fly to Dublin to meet finance ministers. The competitiveness of EU banks is one of main points on the agenda. What’s your message to finance ministers?

First, we need to define competitiveness.

If you look at liquidity, capitalisation, profitability and valuations, or efficiency – cost to income ratios – European banks are doing well. Households, companies and governments are well served by European banks whose interest margins are lower than in the United States. I am not talking here about the companies that need venture capital or similar forms of capital financing.

Reducing capital requirements would not generate more lending. It could just as easily result in more share buybacks.

The comparison with US banks is, however, often focused on trading and post-trading activities rather than traditional lending and deposit-taking. That is an area where scale really matters.

If European banks want to compete directly with large US banks in that area, they need to be able to operate on a much larger scale in a deeper capital market.

How do you enable that?

The answer is neither simplification nor deregulation. The real solution is to complete the banking union and the savings and investments union to create a truly integrated European financial market in which banks can grow.

What is holding back integration?

The European financial market remains highly fragmented in many ways. In trading-related activities alone, for example, there are 27 withholding tax regimes. It is a very difficult environment to navigate. Banks and other market participants have to deal with different rules and legal systems across the EU. Such fragmentation makes business more expensive and less efficient.

Does that affect monetary policy too?

To some extent, yes. Interest rates are transmitted differently because banking systems and market structures differ across countries.

For example, some countries predominantly use fixed-rate mortgages while others use floating-rate mortgages. As a result, policy changes are transmitted faster in some countries than in others. That is evidence that we still do not have a fully integrated market.

I would like to see a situation in which monetary policy is transmitted similarly in Portugal, Germany and elsewhere across the euro area.

Legal Disclaimer:

EIN Presswire provides this news content "as is" without warranty of any kind. We do not accept any responsibility or liability for the accuracy, content, images, videos, licenses, completeness, legality, or reliability of the information contained in this article. If you have any complaints or copyright issues related to this article, kindly contact the author above.