Wage-Price Developments Could Trigger Autumn ECB Hikes, Vasle Says

16 June 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – Wage and price growth could trigger further European Central Bank tightening, ECB Governing Council member Boštjan Vasle said on Friday.

In an interview with Slovenian radio station Prvi, Vasle, who heads the Bank of Slovenia, said that, like the majority of his colleagues, he expected another 25bp hike at the next meeting of the ECB’s Governing Council.

‘What happens in the autumn, however, depends on several factors […] if inflation turns out to be more persistent than it appears to be at present, if other market players react by contributing to further price rises - and here I am thinking in particular of those who set individual prices, but also of the prevailing wage situation at the time - in this case further action will be needed’, he said.

In his opinion, it was ‘appropriate to continue the gradual tightening of monetary policy.’ He added that ‘the prevailing expectation, including my own, is that another rate hike will be necessary before the summer recess, probably at the same pace as before.’

The outlook for the autumn depended on ‘how effectively our rate rises so far will feed through to the economy as a whole', he said. 'If we see that these interest rates are being passed on to lending, that lending growth is moderating as a result, that inflation is beginning to moderate as well, then further interest rate increases will not be necessary.’

The updated ECB staff projections played a role in yesterday’s decision, he said. The ‘two key reasons why we raised interest rates again yesterday’ were ‘that inflation trends are still unfavourable at the moment, and […] that the new forecasts we discussed at yesterday's meeting also show that such inflation trends will continue in the coming quarters, and partly even next year.’

‘The key idea behind the tightening of monetary policy conditions is to stabilise aggregate demand, to stabilise the situation both in terms of growth in economic activity and in terms of wage and inflation developments’, he said. ‘This will contribute to a moderation first of demand and ultimately of inflation.’

External factors caused currently high inflation, he said, ‘but more recently the focus has shifted towards factors that stem from our own economies, that is to say, domestic factors. We are talking about strong demand, including for services, fiscal policies, wage policies.’

Wages were a key upside risk to inflation, in his opinion. ‘It is understandable that wages are adjusting to the current situation, but excessive wage growth, the incorporation of possible new inflationary increases into current wages, can only worsen the situation and further contribute to keeping inflation higher for a longer period of time’, he said.