Politics Lagarde makes it clear that interest rates must remain stable for a while

The president of the European Central Bank (ECB), Christine Lagarde, announced in Berlin that given the magnitude of the interest rate increases so far, time must be given for the monetary adjustment to develop before adopting new monetary measures

Politics Lagarde makes it clear that interest rates must remain stable for a while

The president of the European Central Bank (ECB), Christine Lagarde, announced in Berlin that given the magnitude of the interest rate increases so far, time must be given for the monetary adjustment to develop before adopting new monetary measures.

In a speech on inflation and democracy at an event marking the centenary of Germany's monetary reform in 1923, organized by the German Finance Ministry, Lagarde reiterated that the ECB will condition its future interest rate decisions on economic data. , "which means we can act again if we see the risks of us missing our inflation target increasing." The ECB will therefore remain very attentive until there is "firm evidence that the conditions are in place for inflation" to drop to 2% in the medium term.

Sticking to the seminar's theme, German monetary reform in 1923, Lagarde said Germany's history in the years after World War I is a striking reminder of how price stability and democracy go hand in hand. He highlighted that one of the ways in which price instability does this is by triggering large distributional effects, which often harm the poorest in society the most, in clear reference to the ECB's analysis, according to which, inflation of prices The last 18 months has disproportionately affected low-income households as they spend more of their income on basic necessities such as energy and food, the prices of which have skyrocketed.

"That's why, in response to rising inflation, we raised interest rates at the fastest pace in our history, 450 basis points in just over a year. And we will return inflation to our medium-term target in due course." , Lagarde stressed.

The president of the European regulator identified two main forces that are currently putting downward pressure on inflation. The first is the energy and supply chain crises. The second force is the impact of tightening monetary policy.

"We had to aggressively tighten monetary policy to adjust demand to supply and keep inflation expectations anchored as inflation picked up. And this policy adjustment has had a rapid impact on financing conditions. But its maximum impact on inflation only will materialize with a delay, and given the unprecedented scale and speed of our tightening, there is some uncertainty about the intensity of this effect," Lagarde explained.

The ECB, however, will not be able to start claiming victory, since "the nature of the inflation process in the euro area means that we will also have to remain alert to the risks of persistent inflation."

Given that wage setting in the euro area is multiannual and staggered, the high inflation rates that are now behind us continue to have a significant influence on current wage arrangements. For example, the annual growth rate of compensation per employee was 5.6% in the second quarter of 2023, an increase of 1.2 percentage points compared to the average for 2022.

Lagarde highlighted in that context that workers' ability to earn higher wages is being supported by a tight labor market and strong demand for labor, which has proven surprisingly resilient to a slowing economy since late 2022. " For now, our assessment is that strong wage growth primarily reflects "catch-up" effects related to past inflation, rather than a self-fulfilling dynamic in which people expect higher inflation in the future. But to assess how wages and If they pose a risk to price stability, we will closely monitor a number of developments," he said.

He cited, among them, the ability of companies to absorb the increase in salaries in their profit margins; the flexibility of the labor market, which would prevent excess demand for labor from becoming a factor in persistently high wage demand and the fulfillment of inflation expectations.

Lagarde therefore reiterated that future ECB decisions "will ensure that our official interest rates are set at sufficiently restrictive levels for as long as necessary."