Vice-President of the European Central Bank: Inflation faces "higher and longer" challenges, and raising interest rates is a "prudent" decision to deal with long-term impacts.

European Central Bank Vice President Boris Vujcic said that the decision to raise interest rates by the European Central Bank was "prudent" given that inflation is expected to remain at high levels for a longer period of time. Speaking in London on Tuesday, he also stated that the majority of long-term expectations for future price increases still align with the ECB's 2% target, and current wage growth does not show any signs of a chain reaction. "Overall inflation and core inflation will remain elevated for a longer time - continuing until 2027," Vujcic, who took over as the ECB's second-in-command earlier this month following the departure of Luis de Guindos, said. "And this is basically the potential basis of the interest rate policy measures you saw at the last meeting." Eurozone core inflation stronger than expected Policymakers raised borrowing costs by 25 basis points on June 11, and are currently weighing whether further tightening measures will be necessary in the coming months. They are concerned that inflation caused by the war (currently at 3.2%) is spreading beyond energy sectors. At the same time, they are reluctant to add unnecessary burdens to an already slowing economic activity. Vujcic described economic growth as "relatively resilient," as the euro area, comprised of 21 countries, struggles through another supply shock following the Russian invasion of Ukraine. Earlier on Tuesday, ECB Chief Economist Philip Lane said that despite some progress on a lasting peace agreement in the Middle East, the ECB still faces risks of price growth hovering above the 2% target for a "considerable period of time," requiring policymakers to focus on ensuring inflation stabilizes at the target level in the medium term. ECB President Lagarde said on Monday that the ECB must remain flexible and be prepared to adjust its response measures as shocks evolve. However, she stated that, for now, officials "have not seen evidence of a loosening of inflation expectations or the triggering of second-round effects, which would require stronger policy responses." Vujcic said at a monetary policy forum hosted by Barclays and the Centre for Economic Policy Research (CEPR), "When you look at wages, there's no sign of second-round effects," and that "every worker's compensation is going down." Regarding inflation expectations, he added, "In the medium to long term, they remain anchored." Nevertheless, Vujcic stated that the ECB's decision to raise interest rates "is prudent in all circumstances, as we expect inflation to remain above target for a longer period of time."