ECB to keep raising interest rates to control inflation

• Christine Lagarde reiterated the ECB’s policy guidance.
• Inflation in the 20-nation Eurozone decreased to 8.5% in January.
• Wage rise is a potential source of long-term inflation.

President of the European Central Bank (ECB) Christine Lagarde reiterated the bank’s most recent policy guidance on Wednesday, stating that the euro-inflation zone’s rate is still far too high and that the ECB will maintain raising interest rates to reduce underlying price pressures.

The ECB has increased interest rates by a total of 300 basis points since July and announced another 50-basis-point increase in March in an effort to curb inflation, which was initially sparked by rising energy prices but has subsequently spread to affect almost all sectors.

“Overall, price pressures remain strong and underlying inflation is still high,” Lagarde told the European Parliament in Strasbourg. “Even though most measures of longer-term inflation expectations currently stand at around 2%, these measures warrant continued monitoring.”

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After reaching a peak of 10.6% in October, inflation in the 20-nation Eurozone decreased to 8.5% in January. However, the figure is subject to revision, and the final figure will likely be higher once German data is included.

Inflation in services and non-energy industrial products was also rising quickly, according to Lagarde, and higher ECB rates might stifle demand and ease price pressures.

Additionally, Lagarde singled out wage rise as a possible source of long-term inflation.

Over 5% wage growth this year is still only making up for lost real earnings, but a sharp increase in nominal salaries might have a cascading effect on pricing expectations over the long term.

“The risk of a stronger pass-through of high inflation to wages cannot be ruled out,” Lagarde said. “At this point in time, we are not seeing any obvious sign of an emerging self-sustained wage-price spiral, but that could obviously happen and would come and fuel inflation.”

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