Lagarde sees rates as unlikely to peak in the near future

He sees it necessary for companies to absorb the higher labor costs in their margins

MADRID, 27 Jun. (EUROPA PRESS) -

The European Central Bank (ECB) has warned that inflation in the euro zone is too high and will continue to be so for too long, attributing this persistence to economic agents trying to pass costs on to each other, for which it has warned of the risk that companies will try to defend their margins without absorbing rising labor costs, adding that it is "unlikely" that interest rate ceilings could be declared in the near future.

In her inaugural speech at the central bank forum organized annually by the ECB in the Portuguese town of Sintra, the president of the entity, Christine Lagarde, pointed out the importance of keeping inflation expectations anchored as the process of salary recovery.

In this context, he recalled that, in a first phase that has begun to be completed, companies reacted to the sharp increase in the costs of inputs by defending their margins and transferring the increases to consumers, which caused the disturbances to affect the inflation much faster and more forcefully than in the past.

"Until now, workers have been harmed by the inflationary shock, experiencing a considerable reduction in their real wages, which is encouraging a sustained process of wage recovery to try to reverse these losses," said the ECB president, referring to the impulse bullishness observed in a second phase of the process in other measures of core inflation that capture more domestic pressures, particularly indicators of wage-sensitive inflation and domestic inflation.

In this sense, the French woman has highlighted that the ECB forecasts that wages will grow another 14% between now and the end of 2025 and that they will fully recover their pre-pandemic level in real terms.

In this way, although at this moment a spiral of prices and wages is not observed or an unanchoring of inflation expectations, he has warned that the longer inflation remains above the 2% target, the greater the risks.

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

"But this depends on our policy curbing demand for some time, so that companies cannot continue to show the price behavior that we have seen recently," he said, warning of the risks should companies try to defend its margins.

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

In this way, the president of the ECB has justified that, in the face of a more persistent inflationary process, a more persistent policy is necessary, which, in addition to generating sufficient tightening at present, also maintains restrictive conditions until it is certain that this second phase of the inflation process is over.

Likewise, he explained that, given the uncertainty about the persistence of inflation, the maximum level that interest rates reach will depend on the moment, including how the economy evolves and the different forces described, and that they will have to be reassessed continuously at the long of the time.

Under these conditions, "it is unlikely that, in the near future, the central bank will be able to declare with full confidence that interest rates have peaked," Lagarde concluded.