The ECB president said that a “soft landing for inflation” was “still not guaranteed” within the eurozone.
The European Central Bank has not yet won the match against high inflation, with the 2% target not expected to be reached before the end of 2025, its president Christine Lagarde warned on Monday, July 1. Eurozone inflation was brought down to 2.6% over one year in May – after peaking at 10.6% in October 2022 – which led the monetary institution to reduce its rates in June for the first time in five years.
Nevertheless, “we will not rest until the game is won and inflation is back to 2%,” the ideal rate targeted for the medium term, Christine Lagarde said at the opening of an annual ECB forum in Sintra, Portugal. “Our work is not done and we must remain vigilant,” she warned at the start of her speech.
Given the unprecedented scale of the inflation shock since the start of the euro, “a ‘soft landing’ for inflation is still not guaranteed,” according to the former IMF managing director. While deciding on a first rate cut – widely anticipated – in June, taking them from their historic high, the ECB warned then that the future would be uncertain due to the volatility of inflation.
“Several uncertainties”
While the post-Covid-19 goods shortages, a factor in inflation, appear to have subsided, and the rise in energy prices in the wake of Russia’s war in Ukraine is no longer weighing as heavily, “we still face several uncertainties regarding future inflation,” according to the central banker. She cited in this regard “the evolution of the link between profits, wages and productivity,” at a time when employees are obtaining wage increases to make up for lost purchasing power, and “the question of whether the economy will be hit by new supply-side shocks,” without specifying their nature.
The ECB is indeed forecasting a bumpy path for inflation in the coming months, with potentially higher energy prices and service prices influenced by the strong wage component. However, as already communicated in June, inflation is expected to reach 2% again “at the end of next year”, it added.
The unprecedented tightening of the ECB’s monetary policy, which increased rates by 450 basis points between July 2022 and September 2023, has made it possible to avoid a drop in inflation expectations among economic agents, Christine Lagarde welcomed.
