European Central Bank Governing Council member Boris Vujcic stated that as conflict in Iran heightens stagflation risks, the central bank must remain "highly flexible and vigilant" in managing price stability. Vujcic, who is set to become ECB Vice President in June, indicated that policymakers may soon determine whether the conflict's effects require a response through interest rate hikes. However, he also cautioned that recent developments suggest rising risks of persistent high consumer prices coupled with weak economic growth.
"We are not yet seeing stagflation, but risks are moving in that direction," said the Croatian central bank governor in an interview in Zagreb. "It is difficult to predict how far this could go."
Other policymakers, including Bundesbank President Joachim Nagel, have signaled that the ECB should consider raising borrowing costs at next month’s policy meeting as soaring energy costs begin to feed into inflation. Vujcic expressed openness to such a move.
"In today’s world, the period until April is quite a long time," he remarked. "There will be many new data and developments by then—under these circumstances, anything is possible."
The ECB’s latest projections show that, under the baseline scenario, eurozone CPI is expected to rise 2.6% this year, significantly above earlier forecasts. In a severe scenario, should disruptions in gas and oil supplies persist, inflation could reach 6.3%.
Vujcic noted that while it is prudent to wait briefly at the moment, "we are already moving away from the baseline scenario toward a worse situation."
He suggested that if the ECB deems it necessary to raise borrowing costs, it has two options: begin early with small, gradual increases, or start later with larger hikes.
"It is preferable to start with small steps and observe how the situation evolves," Vujcic said. "For now, I believe it is too early to draw conclusions, but we will soon know whether action is needed."
He added, "I don’t think one or two rate hikes would cause significant harm to the economy. But we must ask ourselves whether they are necessary—just as some might argue that one or two rate cuts would not help the economy much either."
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