The effect of rising energy and food costs on inflation is disappearing and the new concern of the European Central Bank (ECB) is unit labor costs. Labor costs will become the dominant driver of HICP inflation [Índice Harmonizado de Preços do Consumidor], excluding energy and food. Wage growth is expected to remain at more than double the historical average for most of the projection horizon [até 2025]driven by compensation for inflation and labor market tightness, as well as minimum wage increases,” the ECB emphasizes in its new macroeconomic projections released yesterday.
An analysis confirmed by the president of the institution, Christine Lagarde, at a press conference. One of the factors behind “the continued inflation has a lot to do with unit labor costs,” said the ECB leader. “The labor market situation is the good news for Europe. The unemployment level will continue to fall. We see wages continue to rise in the future,” he underlined. However, when asked if the eurozone is facing a “wage spiral”, Lagarde ruled out that scenario. He stressed that “unit labor costs are driving a revision of the core inflation forecast”.
“The labor market situation is good news for Europe. Unemployment will continue to fall,” said the president of the European Central Bank yesterday.
Yesterday, the ECB raised interest rates by 0.25 percentage point, with the reference rate now standing at 4%. A consensual decision in the Board of Governors, which will have taken into account precisely the situation on the labor market. It was a “harmonious discussion, quite deep in terms of the labor market”, and there was “a very, very broad consensus”, the ECB leader stressed.
The central bank bases the further rate hike on the risks associated with underlying inflation and wage pressures. Eurosystem experts have revised their projections for inflation excluding energy and food prices upwards, especially for this year and next, due to previous upside surprises and the implications of the robustness of the work for the pace of disinflation. .
Inflation projections are now rising by a tenth every year compared to March estimates, to 5.4% this year, 3% in 2024 and 2.2% in 2025, still above target. The Frankfurt-based institution’s priority is to bring inflation down to 2%, and Lagarde emphasizes that they are “determined to reach the target in due time”. The thing is, if there are indicators that show a reduction in inflation, there are others that don’t. “We have to have faith in that [a inflação] on the way down”.
This uncertainty leads the ECB to follow a different path from that of the US Federal Reserve, which announced yesterday that it would keep its interest rates, interrupting the cycle of hikes. “As far as the ECB is concerned, we will continue to rise [as taxas de juro]we are not thinking of taking a break, “underlined Lagarde. In fact, the person in charge revealed that this is not currently on the agenda of the ECB: “We have not started thinking about it yet, because we have work to do ” .
On the contrary, Lagarde clearly pointed to the continuation of the climbs. “It is very likely that we will continue to raise interest rates in July,” said Lagarde. Inflation is coming down – in the Eurozone it dropped from 7% in April to 6% in May – but “central bank forecasts indicate it will remain too high for too long”.
However, the institution acknowledges that “previous interest rate hikes by the Governing Council have strongly influenced financing conditions and are gradually affecting the economy as a whole. The cost of borrowing has risen sharply and loan growth is slowing”. And so is Portugal, with households grappling with the rise in mortgage loan payments, mostly indexed to the Euribor, which reflects the ECB’s changes to its base rates.
In addition to the increase in the benchmark interest rate to 4%, the interest rates for the marginal lending facility and the standing deposit facility will be increased to 4.25% and 3.50% respectively. These increases follow the 0.25 pp increase on May 4, which translates to a slowdown compared to previous increases of 0.50 and 0.75 points.
With regard to the development of the economy in the coming months, the ECB has slightly reduced the growth of gross domestic product in 2023 to 0.9%, against the estimate of 1% in March this year, to 1.5% in instead of 1.6% in 2024, and maintained its forecast of 1.6% for 2025. But despite the slowdown at the start of the year, the ECB expects the eurozone economy to “recover from the second quarter of 2023 and will remain solid in the second half of the year”.
Carla Alves Ribeiro is a journalist for Dinheiro Vivo
Source: DN
