ECB’s Lagarde: Interest Rates to Stay Restrictive as Long as Needed for Price Stability

25 August 2023

By David Barwick – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde on Friday repeated that interest rates in the euro area would have to remain at their peak for long enough to restore price stability.

In a speech delivered at Jackson Hole and posted to the website of the ECB, Lagarde said that ‘it is even more important that central banks provide a nominal anchor for the economy and ensure price stability in line with their respective mandates.’

‘In the current environment, this means – for the ECB – setting interest rates at sufficiently restrictive levels for as long as necessary to achieve a timely return of inflation to our 2% medium-term target’, she continued. ‘And moving forward, we must remain clear in our objectives, flexible in our analysis and humble in how we communicate.’

Lagarde noted that robust job markets had ‘put workers in a stronger position to recoup real wage losses’ and that ‘when workers have greater bargaining power, a surge in inflation can trigger “catch up” wage growth which can lead to a more persistent inflation process.’

Labour market tightness could ease with the slowing economy and the disappearance of pandemic-related effects, she said.

‘But we also need to be open to the possibility that some of these changes could be longer-lasting’, she cautioned.

In the case that firms ultimately possess greater ability to pass through higher costs, monetary authorities ‘will have to be extremely attentive that greater volatility in relative prices does not creep into medium-term inflation through wages repeatedly “chasing” prices’, she said.

‘That could make inflation more persistent if expected wage increases are then incorporated into the pricing decisions of firms, giving rise to what I have called “tit-for-tat” inflation’, she added.