Lagarde warns that rates will continue to rise for several more months

European Central Bank (ECB) warned that inflation in the Eurozone is too high and will continue to be so for too long, attributing this persistence to the fact that economic entities are trying to pass on cost increases to each other, which is why they warned that companies involved in the risk will try to defend their margins without absorbing rising labor costs, adding that it is “unlikely” that interest rate caps could be announced in the near future.

In his inaugural speech at the central bank forum organized annually by the ECB in the Portuguese city Sintra (similar to the Federal Reserve Symposium in Jackson Hole), entity president, christine lagardehe highlighted the importance of maintaining anchored inflation expectations as the wage recovery process progresses.

In this context, he recalled that in the first phase, which began to come to an end, companies reacted to the sudden increase in input costs by defending their margins and passing on price increases to consumers, which is why the disruptions greatly affected inflation. faster and stronger than in the past.

“Until now, workers have been hurt by the inflationary shock, experiencing a significant reduction in their real wages, which is prompting a sustained process of wage recovery to try to reverse these losses,” the ECB president said, referring to the observed impulse growth. in the second stage of the process, in other measures of core inflation that include more domestic pressures, especially indicators of inflation sensitive to wages and domestic inflation.

In this sense, the French pointed out that the ECB foresees this wages will rise another 14% between now and the end of 2025 and that it will fully recover to its pre-pandemic level under real-world conditions.

In this way, although at the moment there is no discernible spiral of prices and wages or easing of inflationary expectations, he warned that the longer inflation remains above the target of 2 percent, the greater the risks.

«We need companies to absorb rising labor costs through their marginsLagarde pointed out, for whom if the monetary policy is restrictive enough, the economy can achieve general disinflation, while real wages recover some of the lost ground.

“But it depends on our policy which holds back demand for a while, so companies cannot continue to exhibit the price behavior we have seen recently“, he pointed out, warning of risks in the event that companies try to defend their margins.

“If companies were to recover the 25% margin loss indicated by our projections, in 2025 inflation would be well above that forecast in the reference scenario, almost 3%,” he warned.

In this way, the president of the ECB justified that, in the conditions of an increasingly persistent inflationary process, a more persistent policy is needed which, in addition to currently creating sufficient tightening, also maintains restrictive conditions until it is determined that this second phase of the inflationary process is over.

He also explained that, given the uncertainty about the persistence of inflation, the maximum level that interest rates will reach will depend on the moment, including how the economy develops and the various forces described, and will need to be constantly reassessed at long time.

Under these conditions,”it is unlikely that the central bank will be able to state with full confidence that interest rates have peaked in the near futureLagarde concluded, making it clear with this statement that the next increase in the price of money at the ECB session in July will not be the last one decided by the central bank’s governing council.