Christine Lagarde has well learned the lesson of being the head of a central bank and, speech after speech, underlines the same ideas to make it clear that the work of the European Central Bank (ECB) cannot yet be considered finished in the face of uncontrolled inflation and that it will remain elevated for longer than initially anticipated. “It is unlikely that in the near future the central bank will be able to know with complete confidence whether the pico in rising interest rates. That is why our monetary policy must be decided meeting by meeting and must continue to depend on the data”, once again stated the president of the organization at the opening ceremony of the first of the debate days in Sintra (Portugal), where The ECB annually holds its central bankers’ conclave.
Lagarde is clear that “the full impact has not yet been seen” on the economy of the current rate hike cycle, despite the fact that the ECB has increased the reference rate by 400 basis points in eleven months, driving the rate deposit up to 3.5% and the main refinancing at 4%. It is expected, as the president of the ECB once again recognized this Tuesday in Sintra, that there will be a new rise at the end of July, which will take the rates to the maximum of the year 2000. “Our work is not done yet,” she asserted during his speech.
The key is still knowing how to measure the impact of the current monetary policy on the economy, but its transmission is slow and occurs with a certain delay. Lagarde is clear that companies have picked up the rise in financing costs for households more quickly, through the rise in their mortgage payment, although the ECB believes that the impact will be less since now the percentage of families with fixed-rate loans is higher than it was in the mid-2000s, before the outbreak of the bubble real estate. At the same time, there is a greater number of Europeans who own their homes and, therefore, are in debt, so it cannot be ruled out that the result of the rate hike on households may ultimately be higher than expected. And although it may be paradoxical what the central bank is looking for is to provoke a shock in demand to lower inflation at the cost of depressing the economy.
2022 broke with the trend of decreasing -or excessively narrow- margins for companies. Consumers, for the first time in decades, began to assume that inflation would pass from companies to their pockets, and this allowed European firms to maintain and even raise their profit margins somewhat. However, The ECB believes that now companies must make an effort and join their fight against inflation. They are the ones who must fit the rise in wages into their margins that have been taking place in the Eurozone and, therefore, assume a decline in their net benefits. Otherwise, the ECB warns that if companies tried to recover only a quarter of the loss in their margins caused by the increase in the salaries of their workers, “by 2025 inflation would be clearly above that forecast in the reference scenario, almost 3%”.
According to his calculations, wages will grow another 14% until the end of 2025 and will fully recover pre-pandemic levels in real terms.