Christine Lagarde warns ECB ‘not done’ in inflation fight

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Christine Lagarde has said it is too early to “start declaring victory” in the European Central Bank’s push to tame inflation, calling for rate-setters — and markets — to “allow some time” to see how fast disinflationary forces take effect.

After raising interest rates by an unprecedented 4.5 percentage points in the past year, eurozone policymakers left borrowing costs on hold at their October policy meeting and are expected to do so again in December.

Those pauses and weak eurozone growth have raised expectations that borrowing costs could edge lower, with investors betting the ECB could cut interest rates as early as April.

Lagarde pushed back on market bets, saying on Tuesday the ECB was now “in a phase of our policy cycle which I would characterise as being attentive and focused”.

“Are we done? No,” the central bank president told a German finance ministry event in Berlin, adding that eurozone inflation was likely to rise slightly in the coming months after slowing to 2.9 per cent in October, down from a record high of 10.6 per cent a year earlier.

The ECB targets 2 per cent inflation. “The nature of the inflation process in the euro area means that we will need to remain attentive to the risks of persistent inflation,” she said.

Outlining “two main forces pushing down inflation today” — an unwinding of the energy and supply shocks that accounted for two-thirds of the inflation surge, and the impact of higher borrowing costs, Lagarde said the former was fading and there was “some uncertainty” about the strength of the latter.

Line chart of Harmonised index of consumer prices (annual % change) showing Inflation has fallen for the past year in the eurozone

“We expect headline inflation to rise again slightly in the coming months, mainly owing to some base effects,” she said. “This reflects the sizeable drops in energy costs observed around the turn of last year, and the reversal of some of the fiscal measures that were put in place to fight the energy crisis.”

Speaking at the same event, Christian Lindner, Germany’s finance minister, stressed the importance of maintaining “fiscal policy discipline” to help lower inflation. Responding to Lagarde’s remarks, he warned high borrowing costs would increase the “problems of debt sustainability” for some heavily indebted countries.

He praised the ECB’s focus on reducing price pressures, recalling the “disastrous effect” of German hyperinflation in the 1920s when many people’s income was “not enough to afford bread”.

Lagarde said she kept her “feet on the ground” by going to the supermarket to do her grocery shopping “at least once a week”, helping her to stay in touch with the rising cost of living, even if she did not “look at every single price tag”.

But she warned rising wages meant rate-setters “will need to remain attentive until we have firm evidence that the conditions are in place for inflation to return sustainably to our goal”.

She added: “There is still a journey ahead of us.”

Pointing to the 5.6 per cent annual increase in average pay per eurozone employee in the second quarter, up from 4.4 per cent a year earlier, Lagarde said the ECB was “closely monitoring” whether this would lead to inflation staying persistently above target.

But she expressed confidence that despite strong labour markets increasing the bargaining power of workers, Europe’s recent wage growth reflected a “catch up” effect linked to past inflation “rather than a self-fulfilling dynamic where people expect higher inflation in the future”. She forecast a “further weakening of overall inflationary pressures”.