European Central Bank president Christine Lagarde stated on Monday that wages in the euro area are beginning to rise, though the pace remains moderate and below earlier expectations. The discussion around wage increases suggests that compensation will strengthen and stay above forecasts for the remainder of the year, driven by labor market tensions, adjustments to minimum wages, and higher inflation. The European Parliament’s economic affairs committee has confirmed preparations for the next rate move and the potential deployment of a new anti-fragmentation instrument designed to keep risk premiums in check.
The shift in wages aligns with rising long-term inflation expectations, a view echoed by ECB analysts who have markedly revised projections higher. The latest forecast indicates inflation peaking around 6.8% this year before easing to approximately 3.5% in 2023 and 2.1% in 2024, meaning inflation will still sit slightly above the target at the end of the horizon. It is legitimate for wages to grow, yet it is essential for the ECB to maintain price stability and keep an inflation path near 2%, avoiding any overshoot in inflation the authority explains. This stance reflects a commitment to price stability and a forward-looking inflation outlook that remains a key priority.
monetary normalization
Consequently, the governing council agreed at its June meeting to tighten monetary policy after a record 8.1% inflation in May. The package includes ending net borrowings as of July 1, a quarter-point rate increase at the upcoming July meeting, and the possibility of a second—potentially another quarter-point—in September, provided inflation prospects warrant it. The aim is to steer monetary policy toward a sustainable balance with the medium-term inflation outlook in view.
If the medium-term outlook worsens or remains elevated, a larger adjustment may be appropriate at the September meeting. Any decision will depend on incoming data and the assessment of how inflation evolves over the medium term. The core objective remains clear: anchor inflation around the target while allowing responsible policy adjustment as conditions evolve.
anti-fragmentation tool
Lagarde acknowledged that the pandemic left lingering vulnerabilities within the eurozone economy, which can complicate the transmission of monetary policy across member states. The ECB commits to acting decisively to preserve price stability while ensuring that transmission remains effective. There is a recognized need for transmission supports to be applied where necessary, given the dispersion in risk premiums across countries such as Italy. The plan includes first, flexibly managing the repayment of public debt tied to the Pandemic Emergency Purchase Programme portfolio, and second, accelerating the design of the new anti-fragmentation tool to mitigate large disparities in initial risks.
When asked about the specifics of financial differentials and procedural frameworks, Lagarde indicated that studies are ongoing and would be addressed with the appropriate tools and the necessary flexibility. He emphasized that if fragmentation risks arise, they will be tackled with proportionate measures consistent with the ECB mandate, and warned that doubters who underestimate the resolve could be mistaken in assuming easy options exist. The emphasis remains on a disciplined, data-driven approach to safeguard price stability and the integrity of the euro area’s monetary policy framework.