ECB’s Lagarde Warns of Upside Inflation Risks, Expresses Concern on Wages

10 May 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde warned on Wednesday of upside risks to the inflation outlook in the euro area.

In an interview with Japanese financial newspaper Nikkei, Lagarde said that recent wage settlements in the Eurozone, particularly those in Spain and Germany, appeared large, and called for vigilance.

‘There are factors that can induce significant upside risks to the inflation outlook’, she said. ‘And we are still in a situation where uncertainty about the path of inflation is high, so we have to be extremely attentive to those potential risks.’

Regarding recent wage settlements, she commented that pay increases ‘appear large on the face of it.’ Agreements on pay packages in Spain and Germany were ‘both in double digits over a period of two and three years respectively.’

These labour market developments were ‘a catch-up process that is taking place, but we have to remain very vigilant’, she said.

She reiterated that the ECB was ‘determined to tame inflation, to bring it back to our 2% medium-term target in a timely manner, and we have made a sizeable adjustment already. But we still have more ground to cover.’

The prospect of the ECB selling assets off its balance sheet was not on the table yet, she said: ‘Nothing further [beyond ending reinvestments from the APP] has been discussed by the Governing Council – neither a proposal to sell assets under the APP, nor a change to the forward guidance that we have given in relation to the PEPP.’

The Eurozone macroeconomy was ‘in a better position than what we feared six months ago. Back then everybody was talking about at least a technical recession, and we have avoided that over the winter’, she said. Furthermore, the ECB did ‘not have a recession in our baseline projection for 2023’, and the euro area had ‘a series of factors which point to more positive growth than we had anticipated.’

‘But we still have a lot of uncertainty out there’, she noted. This included ‘what will happen in Russia’s war of aggression against Ukraine and some emerging signs of weakness in demand for manufactured goods.’