The euro area’s price moderation process is expected to continue throughout the year as inflation in January stands at 2.8 percent, one tenth below the level at the end of 2023. The European Central Bank’s Governing Council can have confidence that this path will sustainably converge on the 2 percent objective, according to the president of the ECB, Christine Lagarde.
In a speech to the Economic and Monetary Affairs Committee of the European Parliament, the French leader noted the euro zone’s stagnation in the final quarter of 2023 and added that while incoming data point to modest activity in the near term, several indicators suggest a rebound in the coming year.
Regarding price dynamics, Lagarde highlighted a gradual decline in underlying inflation, though the services component shows signs of persistence. Wage growth remains robust and is expected to become an increasingly important driver of inflation dynamics in the coming quarters.
She reminded listeners that the ECB’s forward wage tracker continues to signal strong wage pressures, even as the agreements reached hint at some stabilization in the last quarter of 2023. As a result, wage pressures for 2024 will largely depend on the outcomes of ongoing bargaining rounds.
Overall, the latest data confirm the ongoing disinflation process, with expectations that it will gradually ease throughout 2024, Lagarde indicated. “We do not want to risk a reversal, as that would waste all we have done and force us to take more measures,” she argued. “We need greater confidence, and that confidence will come from the data we keep receiving, collecting, and analyzing to ensure we are heading in that direction.”
Banking sector
Separately, Lagarde asserted that the bloc is now “much, much better prepared” for a potential crisis. The banking system is stronger, more resilient, better capitalized, and equipped with more liquidity and instruments to measure those levels, with stronger supervision in place.
She recalled that the euro area’s banking sector withstood the shock of last spring’s regional US banking crisis, which saw the closures of Silicon Valley Bank, Signature Bank, and First Republic, along with the European-led Credit Suisse turmoil.
From this episode, Lagarde regards the European supervisor, the European System of Supervisory Authorities, as having provided timely warnings about the risks of interest-rate shifts linked to changes in monetary policy direction. “Sometimes it becomes fashionable to critique centralized supervision, but the March 23 event showed that centralized oversight, with all European banks covered by Basel III requirements, was a real advantage,” she defended.
Looking ahead, Lagarde believes the Single Supervisory Mechanism has fulfilled its mission and that the European banking system is better prepared and stronger. She cautioned, however, that future crisis resilience would be greatly enhanced if both banking union and capital market union were completed, noting that these are the two major elephants in the room that deserve real progress.
Through these comments, Lagarde underscored a steady, data-driven approach to guiding inflation toward the 2 percent target while maintaining robust financial stability across the euro area. The emphasis remains on listening to incoming statistics, maintaining prudent policy, and ensuring confidence in the trajectory of inflation and the resilience of the banking system in the face of evolving economic conditions.