00:00We've obviously got this protracted energy shock. Oil is above $100 a barrel. We have a similar
00:05situation in gas pricing in Europe at the highest level since 2022. How does that shift your outlook
00:11for inflation? How do you see it expanding throughout the eurozone? Yeah, thank you very
00:15much for the invitation for this interview. When we are talking about inflation outlook and the
00:21energy prices, you know, of course, the energy is one part of the whole inflation calculation.
00:28We have also the food, we have also the services, other items of the inflation which really
00:36are now, let's say, on the lower level than we expected. Of course, the energy as one of
00:43the geopolitical very important issues became more and more important because of the volatility.
00:51You're right. We are now on the, let's say, higher level of the oil prices, but it is
00:58volatile. We saw the few days ago, the price went to $110 per barrel. Today, it's already
01:07below $100. In the June was even lower. So actually, that changes which are happening are all short
01:15term. And for us, we are forecasting and oral decisions based on the medium term inflation,
01:23which is 2% in the medium term. Yeah. And the ECB has given us a sort of helpful framework
01:28to think
01:28about this issue, about the different sort of scenarios. Do you think that we're now firmly within
01:32the adverse scenario for the ECB? I don't think so. We are, we did the decision last week and our
01:39decision was based on the main scenario, which means that this, what we are witnessing these days,
01:46that oil prices are going down is something what we expected. So in that respect, also our forecast is
01:55done on the basis of the volatile oil prices, which means that oil will go up and will go down.
02:01But in
02:01the medium term, in this respect, in this year, we expect no additional huge impact on the inflation.
02:12And I know it's a tough question to answer. But at what point do we need to start worrying about
02:16second round effects? Because obviously, that is going to be very central to not necessarily the
02:20size of inflation, but the quality of inflation in Europe. You know, second round effects are also
02:26very important for us. First of all, we take a look on the wages. For now, we see that the
02:32wages are
02:34not increasing at the level which will be characterized as a second round effect. So in that respect,
02:43and other indicators are contained related to the second round effect. And I can say that we don't see
02:49for now any strong impact on the second, which will be characterized by as a second round effect of
02:59inflation, which is now, which is important because then inflation become persistent.
03:05So for now, it's still mostly related to the energy, mostly related to the geopolitics,
03:11which we know very well can be changed in a very short period of time. Those other segments of
03:18inflation are still contained, and we don't see any major second round effects.
03:24And the ECB has been sort of quick to move to ensure that you don't get those persistent
03:28inflation effects with two rate hikes so far. We now are looking at market pricing in the month
03:33of October, 50-50. Do you consider October a live meeting for the ECB?
03:37You know, monetary meetings are always in person, and we then always have a very intensive discussion,
03:45and it will depend on the data which we are going to have at that moment. And of course,
03:50the developments which we expect until the end of the year, and we also need to take a close look
03:58to the outlook for the next year. So the chances for the increase will depend on the data which
04:05we are going to have in the October. For four rate hikes in the coming year,
04:10do you think that that is a reasonable expectation for the market to have,
04:14given where the ECB is today and what you've seen so far?
04:17You know, the markets are always speculating and they have their expectations and their rationale.
04:23For first of all, it's a profit and business oriented. For us, we have the data, inflation,
04:33which is really most important for us to make any decision. So we are not going to
04:40make our decision based on the market expectations, then on the expectations of the future move for
04:46inflation. And thinking about where we are now at 2.5% on the benchmark rate in Europe, for some
04:51people that is seen as the upper end of the sort of neutral band for the ECB. Do you consider
04:55that
04:55to be the upper end of the neutral band? And does that make it harder to raise interest rates?
05:01I don't think so. For us, it's important, and especially for myself, that all inflation indicators are under
05:09control, that we don't have any pressure on that inflation goes too high. And in that respect,
05:18we are not going to frame our decision based on the level. We really need to take care about the
05:26inflation, second round effect, and what you said at the end also on the economy and the GDP.
05:33Yeah, so I guess just trying to understand the thinking there, because I think for
05:35many people going into this, there was the word stagflation was in the air. That was really the big
05:40concerns. Obviously, not just the inflationary side, but the growth side. If we're having inflation,
05:45that is still for the time being quite segregated to the energy sector, is there now a risk of
05:49potentially overdoing it and hitting the brakes on growth? No, for now, we don't see that. Actually,
05:54the second quarter of this year gave us, let's say, some additional optimism of the growth. We
06:01increased the forecast for this year to 0.9% as average for Euro area. There are countries with much
06:08higher growth in Croatia. We expect three times higher growth for this year. So I don't believe
06:18that we are on that level, because we still see the strong demand from the consumer sector. We also
06:25see the investments which are coming into the defense, into the infrastructure. So in that respect,
06:31I think that there are a lot of optimism for the growth, and we really need to care about inflation,
06:38which also at the end can jeopardize the growth. And thinking also about some other risks, which are
06:43not going to necessarily show up in the data. But one thing we're looking about is in the bond market,
06:48obviously yields that are very elevated level, highest level in many places since the financial crisis.
06:53You have this very positive macro story on AI that seems to be holding up a lot of things within
06:58the
06:58market. How vulnerable do you think that these conditions are to a sharp repricing in AI and then
07:04a lot of concerns and volatility within the bond market? How do you rate that risk right now?
07:08Yeah, the bond market is volatile. We see that more overseas. I mean, more in the United States and
07:15in Asia, not so much in Europe. But I think it's very important what you said. It's artificial
07:22intelligence, which brings on the one side more productivity and more efficiency in the
07:30production, which means that in that case, we expect that we'll have a positive impact on the
07:35prices. But there is also, of course, the reason that the prices are going up in the development phase
07:42and the investments and so on. But anyway, our expectations that AI will bring a positive
07:48effect on the inflation. And we also saw some, I think, surprise intervention from the Treasury and
07:55the FX market. Obviously, it affected the euro. How active a conversation has that been at the ECB?
08:00And is ECB now better prepared if we see another kind of intervention like that from the United States?
08:05You know, FX interventions on the global level are very limited. They don't have a huge impact. And
08:13we see that there was no huge impact on the exchange rate after that. So in that respect, our
08:21conversation is related to the very limited scope of these interventions.
08:29And also thinking about leadership at the ECB is obviously a topic that has preoccupied journalists
08:33like us for a while now with sort of suspicions that Lagarde may leave a little bit earlier than
08:39anticipated. Given kind of where we are in the difficulties and the risks that are facing the
08:43eurozone, do you think it's important to clear that up and to get a sort of clear idea of who
08:48is going to be guiding the European economy and the ECB through this difficult period?
08:52Well, I would like to say that first of all, I would not speculate about what President Lagarde will
08:59decide. And the second, I would like to say, which is very important, and I saw that in the ECB,
09:04that the ECB is very well developed, strong institution, which can really carry out all
09:12circumstances which can happen. And then a final question for you on the Croatian economy
09:17specifically, where you've seen, you've enjoyed the high level of growth, also a high level of
09:21inflation and inflation that has not been sort of segregated to the headline level. It's also in
09:25services and all these sorts of things. How do you see the sort of outlook for growth and inflation
09:31in Croatia? And is there anything you can do to get that inflation level down?
09:35First of all, about the inflation, it's important that the difference between
09:41euro inflation and the Croatian inflation is lower and lower. That's very important for us. As you said
09:47at the beginning, it was higher. But we entered the eurozone in a very specific period after the
09:53Covid, when there was also need to re-establish the supply chains and so on. So it was a really
10:01difficult time. And the second part related to the GDP, we are very optimistic. The growth in Croatia
10:08expected for this year is 2.5 and it's going to be around that level in the next two years.
10:14We still have
10:15a strong inflow of the European funds, which help us to create some additional demand and additional
10:24supply, which is important for the Croatian growth.
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