Euro zone inflation stubborn and wages are a risk: policymakers By Reuters

© Reuters. FILE PHOTO: Joachim Nagel, President of Germany’s federal reserve Bundesbank addresses the media during the bank’s annual news conference in Frankfurt, Germany March 1, 2023. REUTERS/Kai Pfaffenbach/File Photo

FRANKFURT (Reuters) – Euro zone inflation is stubbornly and may require a protracted period of high interest rates to contain, in part due to an exceptionally tight labour market, the European Central Banks’ (ECB) two German policymakers said on Wednesday.

The ECB has lifted rates by a combined 4 percentage points in the past year and promised another move in July as it could take until 2025 to get price growth back to 2%.

“Inflation to me is like a greedy beast and we do have to fight against this very greedy beast,” Bundesbank chief Joachim Nagel told a conference. “As inflation fighters we have to be very stubborn because inflation is so stubborn.”

Nagel in the past argued that rate hikes may not be finished before the “summer break”, a hint that yet another increase in September could be on the table.

ECB board member Isabel Schnabel, meanwhile, argued that there was a risk wage growth could fuel price growth, setting off a hard-to-break wage-price spiral.

“The labour market is so incredibly strong,” Schnabel, the head of the ECB’s market operations, told the same event. “The vacancy to unemployed people ratio is at a historical high. This of course raises the bargaining power of the workers.”

She argued that healthy profit margins would absorb most of the wage pressure this year but it was not a given that firms would not pass on higher wages to consumers.

“I think there is a risk that this could turn into such a wage price spiral,” she said. “And this is why we have to be very attentive and have to monitor this very carefully.”

Markets have fully priced in a July rate hike given the ECB’s de facto commitment and they have also priced in another move before rates are seen peaking at 4% this year.

“It would be the first order error to give up too early,” Nagel said.”