Vujcic: ECB Should Not 'Overreact' if Inflation Edges Below 2%

FILE PHOTO: The European Central Bank (ECB) in Frankfurt, is photographed during a heavy rain storm ahead of the ECB council meeting later this week, Germany, March 14, 2023. REUTERS/Kai Pfaffenbach/File Photo
FILE PHOTO: The European Central Bank (ECB) in Frankfurt, is photographed during a heavy rain storm ahead of the ECB council meeting later this week, Germany, March 14, 2023. REUTERS/Kai Pfaffenbach/File Photo
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Vujcic: ECB Should Not 'Overreact' if Inflation Edges Below 2%

FILE PHOTO: The European Central Bank (ECB) in Frankfurt, is photographed during a heavy rain storm ahead of the ECB council meeting later this week, Germany, March 14, 2023. REUTERS/Kai Pfaffenbach/File Photo
FILE PHOTO: The European Central Bank (ECB) in Frankfurt, is photographed during a heavy rain storm ahead of the ECB council meeting later this week, Germany, March 14, 2023. REUTERS/Kai Pfaffenbach/File Photo

The European Central Bank should not "overreact" to euro-zone inflation edging below its 2% target as there are good reasons to believe it will come back up, ECB policymaker Boris Vujcic told Reuters.

The ECB cut interest rates on Thursday for the eighth time in a year but signaled at least a policy pause next month, despite projecting inflation at just 1.6% next year. Inflation in the 20 countries that share the euro was 1.9% in May, according to a flash reading published last week.

Vujcic, who is also Croatia's central bank governor, said price growth was likely to bounce back later and that monetary policy should not try to do "precision surgery" on small fluctuations from its goal.

"A few tens of basis points' deviation on either side of the target is not a problem," Vujcic said in an interview on Saturday in Dubrovnik. "Because you will always have small deviations. If you consider them as a problem, then you will overreact. This is not precision surgery."

Vujcic said it was reasonable to expect inflation to edge back up as energy prices find a bottom and the economy accelerates. Euro strength is also unlikely to have second-round effects on prices unless it lasts several quarters, Vujcic said.

Some ECB policymakers, especially Portugal's central bank governor Mario Centeno, worry that euro-zone inflation may slow too much.

Vujcic said he sees the risks surrounding the inflation outlook as "pretty balanced" but cautioned there was "complete uncertainty" surrounding global trade tensions with US President Donald Trump's administration.

Vujcic recalled advice he received as a young deputy governor from then-Federal Reserve Chair Alan Greenspan: a high rate of inflation was 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.

"Nobody cared about low inflation because of the productivity growth," he said. "You have a monetary policy problem to bring it up. Yes, but why would you insist so much if you don't have a problem in the economy?"

The ECB is reviewing its long-term strategy, including the role of massive bond purchases, or quantitative easing, in reviving inflation when it is too low.

The ECB injected some 7 trillion euros ($8 trillion) of liquidity into the banking system through QE and other tools over the past decade. These schemes were blamed for inflating bubbles in real estate and setting up the central bank for sizeable losses.

"The next time around, people will take the lessons from the previous episode, and I think that the bar for QE would be higher," Vujcic said.

He said QE could help stabilize dysfunctional markets - such as during the 2008 financial crisis and the COVID-19 pandemic - but if used "for years and years to try and bring inflation up, its marginal efficiency declines".

Such calls for self-criticism are shared by some policymakers in the ECB's hawkish camp. But sources told Reuters they were unlikely to feature in the ECB's new strategy document, to be published this summer.



Trump Says Steep Copper Tariffs in Store as He Broadens His Trade War

A worker makes copper trays inside a workshop in Kolkata, India, October 26, 2017. Picture taken October 26, 2017. (Reuters)
A worker makes copper trays inside a workshop in Kolkata, India, October 26, 2017. Picture taken October 26, 2017. (Reuters)
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Trump Says Steep Copper Tariffs in Store as He Broadens His Trade War

A worker makes copper trays inside a workshop in Kolkata, India, October 26, 2017. Picture taken October 26, 2017. (Reuters)
A worker makes copper trays inside a workshop in Kolkata, India, October 26, 2017. Picture taken October 26, 2017. (Reuters)

US President Donald Trump on Tuesday said he would impose a 50% tariff on imported copper and soon introduce long-threatened levies on semiconductors and pharmaceuticals, broadening his trade war that has rattled markets worldwide.

One day after he pressured 14 trading partners, including powerhouse US suppliers like South Korea and Japan, with sharply higher tariffs, Trump reiterated his threat of 10% tariffs on products from Brazil, India and other members of the BRICS group of countries.

He also said trade talks have been going well with the European Union and China, though he added he is only days away from sending a tariff letter to the EU.

Trump's remarks, made during a White House cabinet meeting, could inject further instability into a global economy that has been shaken by the tariffs he has imposed or threatened on imports to the world's largest consumer market.

US copper futures jumped more than 10% after Trump's announcement of new duties on a metal that is critical to electric vehicles, military hardware, the power grid and many consumer goods. They would join duties already in place for steel, aluminum and automobile imports, though it was unclear when the new tariffs might take effect.

US pharmaceutical stocks also slid following Trump's threat of 200% tariffs on drug imports, which he said could be delayed by about a year.

Other countries, meanwhile, said they would try to soften the impact of Trump's threatened duties after he pushed back a Wednesday deadline to August 1.

Trump's administration promised "90 deals in 90 days" after he unveiled an array of country-specific duties in early April. So far only two agreements have been reached, with the United Kingdom and Vietnam. Trump has said a deal with India is close.

Trump said countries have been clamoring to negotiate.

"It's about time the United States of America started collecting money from countries that were ripping us off ... and laughing behind our back at how stupid we were," he said.

Trading partners across the globe say it has been difficult to negotiate even framework agreements with the US given the haphazard way new tariffs are announced, complicating their internal discussions about concessions.

HIGHEST LEVELS SINCE 1934

Following Trump's announcement of higher tariffs for imports from the 14 countries, US research group Yale Budget Lab estimated consumers face an effective US tariff rate of 17.6%, up from 15.8% previously and the highest in nine decades.

Trump's administration has been touting those tariffs as a significant revenue source. Treasury Secretary Scott Bessent said Washington has taken in about $100 billion so far and could collect $300 billion by the end of the year.

The United States has taken in about $80 billion annually in tariff revenue in recent years.

The S&P 500 finished slightly lower on Tuesday, a day after Wall Street markets sold off sharply following Trump's new tariffs announcement.

Trump said he will "probably" tell the European Union within two days what rate it can expect for its exports to the US, adding that the 27-member bloc had been treating his administration "very nicely" in trade talks.

The EU, the largest bilateral trade partner of the US, aims to strike a deal before August 1 with concessions for key export industries such as aircraft, medical equipment and spirits, according to EU sources. Brussels is also considering an arrangement that would protect European automakers with large US production facilities.

However, German Finance Minister Lars Klingbeil warned that the EU was prepared to retaliate if necessary.

"If we don't reach a fair trade deal with the US, the EU is ready to take counter measures," he said in the lower house of parliament. Japan, which faces a possible 25% tariff, wants concessions for its large automobile industry and will not sacrifice its agriculture sector, a powerful domestic lobby, for the sake of an early deal, top trade negotiator Ryosei Akazawa said on Tuesday.

South Korea, which also faces a possible 25% tariff, said it planned to intensify trade talks over the coming weeks "to reach a mutually beneficial result."

Washington and Beijing agreed to a trade framework in June, but with many of the details still unclear, traders and investors are watching to see if it unravels before a separate, US-imposed August 12 deadline or leads to a lasting detente.

"We have had a really good relationship with China lately, and we're getting along with them very well. They've been very fair on our trade deal, honestly," Trump said, adding that he has been speaking regularly with Chinese President Xi Jinping.

Trump said the United States would impose tariffs of 25% on goods from Tunisia, Malaysia and Kazakhstan; 30% on South Africa and Bosnia and Herzegovina; 32% on Indonesia; 35% on Serbia and Bangladesh; 36% on Cambodia and Thailand; and 40% on Laos and Myanmar.

Cambodia hailed as a big success a reduction in the tariff rate from 49% to 36% and said it was seeking to negotiate a further cut. The tariffs have been an issue for Cambodia's garments and footwear sector, the biggest driver of its economy.

The US is also the main export market for Bangladesh's ready-made garments industry, which accounts for more than 80% of its export earnings and employs 4 million people.