“We still face several uncertainties regarding future inflation,” which could disrupt the exit from the inflationary spiral.
Christine Lagarde in Frankfurt, Germany, on June 6, 2024. (AFP / KIRILL KUDRYAVTSEV)
Although the worst of the crisis seems to have passed, the European Central Bank has not yet “won” the match against inflation, warned its president Christine Lagarde on Monday, July 1, who believes that the 2% target should not be reached before the end of 2025.
Inflation in the eurozone has been
reduced to 2.6% over one year in May – after peaking at 10.6% in October 2022
– which led the monetary institution to cut its rates in June for the first time in five years. Nevertheless, “we will not rest until the game is won and inflation has returned to 2%”, the ideal rate targeted in the medium term, Christine Lagarde declared at the opening of an annual ECB forum held in Sintra, Portugal.
“Our work is not done and we must remain vigilant”
she warned at the beginning of her speech. Given the unprecedented scale of the inflationary shock since the start of the euro, “a ‘soft landing’ for inflation is still not guaranteed,” according to the former IMF managing director.
“Uncertainties”
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. If the shortages of goods post-Covid-19 crisis, a factor of inflation, seem to have been resolved, and the rise in energy prices in the wake of the Russian war in Ukraine no longer weighs as much,
“We still face several uncertainties regarding future inflation”
according to the central bank.
She cited in this regard “the evolution of the link between profits, wages and productivity”, at a time when employees obtain wage increases to make up for lost purchasing power, and “the question of whether the economy will be hit by new shocks on the supply side”, without specifying their nature.
The ECB actually plans
a bumpy ride for inflation in the coming months,
with potentially higher energy prices and prices in services influenced by the high wage component.
However, as already communicated in June, inflation should again reach 2% “at the end of next year”, she 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.
