The European Central Bank can’t declare victory over inflation just yet and will have to remain “attentive” until it’s firmly headed back to the 2% goal, President Christine Lagarde said.
While the energy and supply-chain shocks that boosted prices are now easing, labor markets are still adjusting and wages are rising, Lagarde said in speech in Berlin on Tuesday.
“We have faced a major inflation shock and we have made a major policy adjustment in response,” she said. “The effects of that adjustment are increasingly being felt and inflation pressures are easing.”
“But there is still a journey ahead of us,” Lagarde warned. “Our monetary policy is in a phase where we need to be attentive to the different forces affecting inflation – but always firmly focused on our mandate of price stability.”
The ECB left its deposit rate at 4% last month, and officials have stressed that it will have to stay at least at this level for an extended period to get inflation under control. Bank of France Governor Francois Villeroy de Galhau said Monday that borrowing costs will probably kept steady for “the next few quarters.”
Investors are still focusing on when the first cut will happen, expecting the first move as soon as April. Belgian central bank governor Pierre Wunsch warned in an interview that such bets could lead the ECB to raise interest rates if they undermine the institution’s policy stance.
While euro-zone inflation has slowed to 2.9%, it’s expected to pick up again in the coming months due to volatility on energy markets. Wages are also seen as a key risks that could keep price pressures elevated as labor markets remain resilient to weakness in the broader economy.
“Given the scale of our policy adjustment, we can now allow some time for them to unfold,” Lagarde said.
