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Christine Lagarde has called on the European Central Bank to keep interest rates high to prevent prices from staying above target due to a tight labor market and large euro zone wage increases.
The ECB president said at the annual meeting in Sintra, Portugal, that the euro zone had been hit by “overlapping inflationary shocks since the end of the pandemic”. He said the ECB had “made great strides” in dealing with high inflation by raising the base rate to 3.5% this month from -0.5% last year, but said it was “not yet ready to declare victory.” I can’t,” he said.
Lagarde said the early stages of inflation, when the costs of supply shocks in energy and other commodity markets are passed on to consumers by businesses, are fading. But a second phase has emerged, driven by rising labor costs, with eurozone wages expected to rise by 14% by 2025.
“Slower productivity growth will put further pressure on unit labor costs and keep nominal wages rising for several years,” he added.
ECB likely won’t know when borrowing costs will peak due to uncertainty over how these factors will affect prices, but ECB rose another quarter of a point in July He said it was “very likely” to do so. “In these circumstances, it is unlikely that central banks will be able to say with complete confidence that rates have peaked any time soon,” Lagarde said.
“My intention is not to suggest future decisions, but rather to frame the problems that monetary policy will face in the coming period.”
With a growing shortage of skilled workers, more companies are hoarding labor, and Lagarde said wages are rising faster than output, putting upward pressure on inflation and lowering productivity. said that The eurozone unemployment rate fell to a record low of 6.5% in April.
Eurozone annual inflation is expected to ease to 5.6% in June, when new price data are released on Friday, still well above the ECB’s 2% target, but energy and food prices are expected to drop. The slump continues, down from its October peak of 10.6%. .
But the ECB has said it will continue to raise rates until underlying price pressures subside significantly, and core inflation, excluding energy and food, is expected to rise to 5.5% this month from 5.3% last month.
The ECB expects corporate profit margins to fall as labor costs rise. But avoiding a quarter of those margin losses would keep inflation at almost 3% in 2025, Lagarde estimates. “We don’t see a wage price spiral or entrenched expectations at this point, but these risks increase the longer inflation stays above target.”
Italy’s right-wing government has criticized the ECB president’s signal on interest rates. Foreign Minister Antonio Tagjani said higher borrowing costs “meaning companies were in trouble”. If interest rates are too high, there is a risk of a recession,” he said, adding that he opposed “pre-announcement like Lagarde did today.”
Deputy Prime Minister Matteo Salvini said that Lagarde’s comments were “nonsensical and harmful” and that his allied parties were to “discuss the problem and analyze the solution”, the ECB’s Italian representative (Ignazio Visco, Banco Italia) Governor) said he would consult with him.
The ECB has never raised rates so large and so quickly in the past year, so Lagarde said there was uncertainty about when these higher borrowing costs would translate into consistent downward pressure on prices. said there is.
Lagarde said the ECB needs to be committed to keeping interest rates as high as necessary to ensure inflation stays low. “This will ensure that rate hikes do not provoke expectations of too abrupt policy shifts and that past actions can be maximized.”
In a memo to clients, Goldman Sachs analysts said Lagarde’s “pretty hawkish” comments suggest the ECB may still be a long way from reaching its highest rate. “Rather than seeing slowing growth as exacerbating policy trade-offs, the ECB sees exacerbating policy trade-offs,” he said. added. The ECB sees it as a means of lowering inflation. “
Additional report by Giuliana Ricozzi in Rome