ECB’s Lagarde emphasizes vigilance in inflation battle, outlines wage dynamics and policy outlook

ECB President Christine Lagarde, in her speech overnight, cautioned against premature optimism on the ongoing fight against inflation in Eurozone, stating emphatically, “this is not the time to start declaring victory”.

Lagarde highlighted the complex nature of inflation in the Eurozone, stressing the need for ongoing attentiveness to the risks of “persistent inflation”. The dynamics of “wage-setting” in the region, which are often “multi-annual and staggered”, play a significant role in this context.

She pointed out that “the high inflation rates that are now behind us are still having a significant influence on wage agreements today,” indicating the lag effect of past inflation on current wage negotiations.

Addressing the current wage growth scenario, Lagarde opined that it primarily represents “catch-up” effects from past inflation, rather than being driven by expectations of future inflation. However, she noted the importance of monitoring wage developments to assess any potential risks to price stability. This involves closely observing how firms manage rising wages, whether there is an easing of labor market tightness, and ensuring that inflation expectations remain anchored.

Lagarde also reiterated ECB’s commitment to maintaining policy rates at sufficiently restrictive levels for as long as necessary to achieve its inflation targets. She emphasized that future decisions will be data-dependent, allowing ECB the flexibility to act again if the risk of missing inflation target increases.

Full speech of ECB Lagarde here.