The European Central Bank (ECB) will continue its rate hikes but the “cruising altitude” is approaching as inflation recedes, its president Christine Lagarde said Thursday at a banking conference.
We will continue to move forward – with determination and without discouragement – until we see inflation return to our medium-term target of 2% in a timely manner, declared Christine Lagarde Hanover, before the congress of the German Savings Banks.
In the past nine months, the monetary institution has decided on seven rate hikes in a rowie a cumulative 3.75 percentage points, with a step of 0.25 points in May, which was the weakest of the cycle.
At the start, the aircraft should climb steeply and accelerate rapidly. But as it gets closer to its target altitudehe can reduce the acceleration and keep his current speedexplained in a metaphorical tone to the French central banker.
The ECB has not yet won the battle
Now we are approaching our cruising altitude, she added. The first effects of these accumulated rate hikes are visible – decline in credit, slackening of demand – but the ECB is still far from having won the battle against high inflation. Since its peak of 10.6% year-on-year last October, inflation in the euro zone has certainly fell 6.1% in May, according to Eurostat on Thursday. But it is still three times above the target set by the ECB.
Also, two more increases of 25 basis points each (in June and July) should intervene before keeping them unchanged, according to Salomon Fiedler, an analyst at Berenberg. Headline inflation is receding on lower energy prices, but there is no clear evidence that underlying inflation (excluding energy and food) has peaked, Ms Lagarde warned. .
Salary increases
The Governing Council of the ECB was already concerned about this in May, according to the minutes of the monetary policy meeting published on Thursday: some of the latest wage increases, particularly in the public sector, were considered worrying around the table, the document reads.
Negotiated salaries, including bonuses, increased by more than 5% year-on-year in January and February, it was pointed out, adding upside risks to future inflation.
In services in particular, wages, as a key component of final prices, will play an increasingly important role in explaining underlying inflation, especially as employment increases there, observed the guardians of the euro. In fact, the longer inflation remains above our target, the greater the risk that it will infiltrate people’s expectations, warned Ms. Lagarde. According to its latest forecasts in March, the ECB sees inflation returning to 2% before the second half of 2025which would make four years of exaggerated price increases.
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