Croatian Central Bank governor Boris Vujcic reiterated on Monday that he expects inflation to keep decreasing in 2024 and 2025, when it is expected to reach the target of about 2%.

The hardest part, for structural reasons, will be reducing inflation from 3% to 2%, he said at the Croatian Economic Association’s 31st conference on Croatia’s economic policy.

The labour market is different and puts pressure on the inflation rate, and the question is what we will have to sacrifice on the labour market to reach the targeted inflation rate, Vujcic said, adding that unit labour costs will keep increasing.

The pressure on inflation will be lower to the extent that companies can compensate for the pressure of pay growth through high unit profits, he said, adding that if they don’t succeed, the pressures on inflation will be bigger.

Demographic trends have also changed, with a shrinking of the working age population, which means that we will have to import 400,000 workers, but in a strategic way, Vujcic said. Croatia will be markedly different socially, politically and economically in the next generation, or there will be no growth, and people will have to work longer, he added.

The changes around Croatia are complex, with potentially big effects on either higher or lower inflation, and the net effect of structural factors on inflation is likely to become positive, Vujcic said.

Central banks will take action and the years-long trend of falling long-term interest rates might change due to potentially stronger and more volatile inflationary pressures, he added.

Responding to questions from the press, Vujcic said that the labour market is markedly different in the disinflation process than in the previous cycle.

The Croatian, euro area and US economies have slowed down, notably the euro area, but the labour market is still strong, while unemployment is at the lowest rates and real wages are positive, which contributes to pressures on price trends, notably in services, he added.

As for why the labour market is so resilient, Vujcic said there was no accurate answer yet and that part of the answer lay in a changed labour market after the pandemic as the way of working changed. The high rate of job creation makes workers’ negotiating power stronger, which puts pressure on inflation, he added.

Asked about a recession, Vujcic said he did not see it for now but that he did see a relatively stagnant economy which would gradually recover in 2024. As long as we have disinflation and high interest rates, we can’t expect the economy to recover quickly, but the price we are paying for disinflation, with two-digit inflation rates, is low because there is neither a recession nor an increase in the unemployment rate, he added.

Commenting on the sale of treasury bills, he said the state was doing it for the second time, that it was reasonable because of relatively favourable borrowing conditions, and that those embarking on this would generate a higher income than by keeping money in the bank.