In a speech at the International Monetary Fund's annual meetings in Marrakech, European Central Bank President Christine Lagarde emphasized that underlying inflation in the Euro Zone remains robust, while wage growth is at historically high levels. Lagarde echoed her assessment from last month, underlining the need for further progress in taming consumer prices.
Lagarde highlighted that core inflation in the Euro Zone continues to remain elevated, primarily driven by rising labor costs that compensate for the fading impact of previous surges in input costs. She stressed that historically high wage growth is a result of employees demanding compensation for the loss in purchasing power amidst tight labor markets.
While reiterating the collective forecast of Euro Zone officials, Lagarde expects inflation to slow down and reach the 2% target by 2025. The recent interest rate decision, where they were raised for a 10th consecutive time, reflects officials' commitment to keeping rates high. Lagarde indicated that wage growth is projected to gradually decline over the forecasted period due to minimum wage increases and inflation compensation, despite remaining high in a cooling labor market context.
Addressing the risks that could impact the Euro Zone's economic outlook, Lagarde mentioned the potential of weaker demand resulting from a stronger transmission of monetary policy or a deterioration of the international economic environment. She noted that downside risks need careful evaluation, particularly regarding the ramifications of past rate increases.
Lagarde also discussed the potential for changes in economic growth. She stated that growth could slow if the effects of monetary policy turn out to have a more forceful impact than anticipated or if the global economic climate weakens further, coupled with intensified geopolitical risks. Conversely, growth could surpass projections if the strong labor market, increasing real incomes, and reduced uncertainty boost confidence among consumers and businesses, leading to higher spending.
Overall, Lagarde's remarks affirm the ECB's focus on controlling inflation and maintaining economic stability in the Euro Zone. Despite acknowledging potential risks, she remains optimistic about the path towards achieving the inflation target and emphasizes the importance of monitoring the impacts of past rate adjustments.