“Too soon to claim victory.” “Our work is not done.” It sounds like war vocabulary, which shouldn’t be surprising no matter how much it’s about monetary policy. Because it’s always about fighting, even if it’s against inflation.
European Central Bank (ECB) President Christine Lagarde is feeling increasingly comfortable playing the hawk role (as she suggested the Bank for International Settlements do last Sunday). She returned this Tuesday to emphasize the message she sent a couple of weeks ago at the bank’s last board meeting: in July, “unless there is a significant change in our outlook”, interest rates will rise another time.
The French lawyer, who participates in the annual meeting of the central banks that takes place in Sintra (Portugal), refused to give indications on what the level of the price of money could be at which to stabilize the current withdrawal of stimuli. To the contrary, she added that “in the near future, it is unlikely that the central bank will be able to say with certainty that rates have peaked.” In other words, it is still early to say with certainty that the July rise will be the last of this cycle, which began just a year ago, in July 2022.
At its previous meeting, the institution decided to raise its rates for the eighth time in less than a year, which placed them at 4%. Another rise would take the price of money to its highest in this century. Eurozone inflation fell to 6.1% year-on-year in May, a long way from the record 10.6% reached in October, but also from the central bank’s 2% target.
Lagarde blamed part of the blame for the persistence of inflation on companies and their opportunism when it came to raising prices. Initially, Lagarde argued, the companies passed the higher costs on to consumers. But “the intensity of this reaction was unusual.” In the past, the ECB president reasoned, companies tended to absorb price increases by reducing profit margins, partly because consumers were less willing to tolerate unjustified increases.
But the huge increase in costs last year made it harder for consumers to see the reasons for the higher prices. “In addition, demand spikes from the reactivation of sectors, excess savings, expansive policies and supply constraints encouraged companies to challenge consumer demand with higher prices.” As a result, “benefits contributed two-thirds to domestic inflation in 2022, when in the last 20 years it had been one-third.” So Lagarde’s message is more directed at companies than at workers. Because in terms of remuneration, the ECB calculates that they will rise 14% by 2025, but even so, “a price-salary spiral” is not seen.
Italian Deputy Prime Minister Matteo Salvini was highly critical. “Does Lagarde have a variable rate mortgage? Does she know how much the fees go up? Who benefits from these absurd decisions?” he asked.
