ECB must stop quick wage growth from fuelling inflation, Lagarde says

© Reuters. FILE PHOTO: President of European Central Bank Christine Lagarde arrives for a meeting with Cypriot President Nicos Anastasiades at the Presidential Palace in Nicosia, Cyprus March 30, 2022. REUTERS/Yiannis Kourtoglou

FRANKFURT (Reuters) – Euro zone wages are growing quicker than earlier thought and the European Central Bank must prevent this from adding to already high inflation, ECB President Christine Lagarde told a Croatian newspaper.

The ECB has raised interest rates by a total of 2.5 percentage points since July in a bid to arrest a historic surge in inflation and has promised even more policy tightening over its next several meetings as longer term price growth expectations have started moving above its 2% target.

“We know wages are increasing, probably at a faster pace than expected,” Croatian newspaper Jutarnji list quoted Lagarde as saying on Saturday. “We must not allow inflationary expectations to become de-anchored or wages to have an inflationary effect.”

Lagarde provided no new policy hint in the interview but said the bank must “take the necessary measures” to lower inflation to 2% from its current rate of near 10%.

Croatia will join the euro zone on Jan. 1 as the currency bloc’s 20th member, entering an elite club at a time of unusual turmoil as the ECB tries to tame inflation after spending the past decade unleashing unprecedented stimulus to rekindle price growth when it was exceptionally low.

“We need to be careful that the domestic causes that we are seeing, which are mainly related to fiscal measures and wage dynamics, do not lead to inflation becoming entrenched,” Lagarde said.

Lagarde added that the bloc’s expected winter recession, induced by soaring energy costs, is likely to be short and shallow, provided there are no additional shocks.