ECB mission on inflation not yet accomplished, insists Lagarde

Higher-for-longer interest-rate era is worrying global finance officials regarding the potential consequences

Christine Lagarde says underlying inflation is still strong and wage growth high. Picture: Bloomberg

European Central Bank president Christine Lagarde said underlying inflation in the eurozone is still strong and wage growth is “historically high”.

Speaking at the International Monetary Fund’s annual meetings in the Moroccan city of Marrakech, she largely repeated last month’s assessment of the economy, while stressing that progress is still needed in taming consumer prices.

Core inflation remains at elevated levels, reflecting the fact that the fading impact of the past surge in input costs is being counterbalanced by rising labour costs.

“Indeed, employees demanding compensation for the loss in purchasing power amid tight labour markets has resulted in historically high wage growth,” said Ms Lagarde.

Inflation should still slow to the 2% target in 2025, she observed, reiterating the collective forecast of officials at the meeting on September 14. That gathering saw a close-run decision to raise interest rates for a 10th consecutive time, with a pledge to keep them high and further increases not ruled out.

“Wage growth is expected to decline gradually, albeit remaining high over the projection horizon, driven by increases in minimum wages and inflation compensation in a context of tight, though cooling, labour markets,” she said.

Revisiting a theme touched on during a panel discussion, Ms Lagarde suggested that assessing the impact of prior increases in rates remains crucial. 

“Downside risks include weaker demand, due for example to a stronger transmission of monetary policy or to a worsening of the international economic environment,” she said.

Prospects for expansion

Ms Lagarde offered a similar view on prospects for expansion.

“Growth could be slower if the effects of monetary policy turn out to be more forceful than expected, or if the world economy weakens further and geopolitical risks intensify,” she said. “Growth could also be higher than projected if the strong labour market, rising real incomes, and receding uncertainty boost confidence among consumers and businesses and lead them to spend more."

Speaking later to an audience of central bankers hosted by the Group of 30, Ms Lagarde stressed that the ECB has not yet reached the moment where it can declare mission accomplished.

“It’s not a question of being hawkish or dovish, but it requires us at this point in time to be patient, as supply shocks reverse and new shocks arrive, and be attentive to ensure that inflation expectations remain anchored when inflation is still too high,” she said. 

Meanwhile, the higher-for-longer interest-rate era means global finance officials are getting worried about the consequences.

Rising long-term bond yields signal investors increasingly believe cheap borrowing is over.

Attendees at IMF meetings cautioned that wholesale tightening risks inflicting a shock to a world economy already on edge. Picture: Andrew Harrer/Bloomberg

 Multiple attendees at the IMF's meetings last week cautioned that the wholesale tightening now risks inflicting a shock to a world economy already on edge as war rages in the Middle East.

“Debt levels are at record high levels at the same time that we’re in this higher-for-longer interest-rate environment,” Gita Gopinath, the No 2 official at the IMF, told a panel. “There is a lot for us to watch carefully — and that could go wrong.”  

She and peers do not need to stretch their minds back far for an example. Their nerves were tested this year with a string of regional US bank collapses, followed by property jitters that have yet to dissipate. 

The IMF meetings, held alongside the World Bank, marked the first time that finance ministers and central bankers have gathered to discuss the outlook since the US Federal Reserve’s symposium in Jackson Hole in August put investors on notice that restrictive monetary policy might need to endure. 

Since then, oil-market gyrations and the Hamas attack on Israel have only served to cement the impression of a volatile backdrop, at a time when the global economy is still adjusting to the unprecedented pace of synchronised tightening of the past year. 

They face the fallout of multiple shocks in recent years. A collective assessment from the Group of 20 finance chiefs chimed with that view. 

Their communique stressed risks ranging from “geo-economic tensions, extreme weather events, natural disasters, and the tightening of global financial conditions which could worsen debt vulnerabilities”. 

• Bloomberg