INARI. The European Central Bank is now very closely monitoring the development of wage increases, says the CEO Christine Lagarde In an interview with in Saariselka.
– There is no inflation spiral in sight due to the rise in wages, but it would be a very difficult situation if one were to occur, Lagarde warns.
If wages rise significantly, it accelerates inflation as consumption increases. When consumer prices are already rising at a fast rate of 8-9 percent in the euro area, large wage increases would only fuel the rise in prices.
In this case, the central bank has to break the cycle according to the task given to it, and it can do that by cooling the economy, i.e. by raising interest rates.
You can watch Lagarde’s entire interview and the students’ questions here:
Read more: Europe’s future monetary policy is outlined in Lapland, CEO Lagarde holds a secret retreat in Saariselka before the official meeting
In an interview with , the CEO Christine Lagarde repeats a couple of times that the ECB intends to slow down the rise in prices to the two percent it aims for – “whatever it takes”.
The expression is the same as the previous CEO Mario Draghi used during the deepest euro crisis ten years ago: the central bank is doing everything to accelerate economic growth. The statement started a huge central bank stimulus, which has continued until these days.
– Our task is to show determination in slowing down inflation to two percent. Inflation will return to two percent, Lagarde says firmly.
That likely means ever-rising interest rates. Since the summer of last year, the ECB has raised key interest rates by three percentage points. At least in March, the bank plans to increase the interest rate by 0.5 percentage points.
The decision-making body of the European Central Bank, the 26-member Council, has gathered in Inari, Lapland, for the beginning of the week. Based on the latest research data, the central bankers are considering, among other things, how the rise in wages affects inflation in different parts of the euro area, and how it should be reacted to.
– Reducing inflation to two percent is not only our goal, but it is the best thing we can do for the economy, says Lagarde.
Getting inflation under control also gives the opportunity to lower interest rates, Lagarde reminds. This, in turn, eases the governments’ interest expenses as well.
There is a big wage dispute going on in Finland. Can inflation take off due to wage demands?
– We look at salary negotiations very carefully, because it is a key factor for us [inflaation seurannassa] and it is a key factor for humans as well. It is important for negotiators to understand that inflation will return to two percent. We will not bow to our knees and we will not falter in the face of the task, but we will do what is required to curb inflation.
According to the ECB’s own forecast, inflation will only fall to 2.4 percent in two years at the current rate. The government’s debt service costs can clearly rise before then.
Aren’t you afraid you’ll cause a recession by raising interest rates so quickly?
– I would like to point out that everyone was talking about sinking into recession at the end of last year and at the beginning of this year in the euro area. This has not happened.
– No European country is in recession in 2023. All European countries should manage. Not well, not in very large numbers, but there won’t be a recession, says Lagarde.
Now that interest rates are rising, what will happen to heavily indebted countries like Italy?
– The debt servicing costs of all euro area countries are increasing. In those eurozone countries, such as Finland, which have extended their loan periods, the increase in debt servicing costs will be seen later when the repayments come forward, says Lagarde.
However, debt service costs do not rise unexpectedly, but gradually.
– If and when we succeed in reducing inflation, we will have a time when interest rates no longer need to be kept high – as long as it is confirmed that inflation has fallen to the target level, says Lagarde.
The actions of the European Central Bank are reflected throughout the economy. Lagarde answered Finnish students’ questions during the interview.
The questions brought up, among other things, how to prepare for severe economic discipline in the next few years, how the ECB can affect the division of societies and whether immigration can solve labor shortage problems.
Aalto University students asked Lagarde questions Sea Raven and Rasmus Räsänen and the University of Helsinki Joona Rissanen, Jolana Kapp and Henna Vättö. The questions can be found in the video above.
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