FRANKFURT (Reuters) -Euro zone inflation is stubborn and may require a protracted period of high interest rates to contain, partly 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.”
Price growth could come down quickly in the coming months and that may raise pressure on the ECB to stop tightening but lower headline inflation could mask underlying pressures, so it won’t necessarily mean that the job is done, Nagel argued.
“It would be a first order error to give up too early,” Nagel said.”
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.
Nagel’s French colleague, Francois Villeroy de Galhau took a more nuanced view, emphasizing the duration of high rates over further hikes, which would be “limited,” in any case.
“What matters is how long we remain at the terminal rate rather than its level,” Villeroy told French newspaper Les Echos.
Markets have fully priced in a July rate hike given the ECB’s de facto commitment and have also priced in another move in September or October, putting the rate peak at 4%.
ECB board member Isabel Schnabel, another German, also emphasized the risk that price growth could remain stubborn as there was a danger that wage growth could fuel prices, setting off a hard-to-break wage-price spiral.
“The labour market is so incredibly strong,” Schnabel, in charge of the ECB’s market operations, said. “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.”
Peter Kazimir, Slovakia’s central bank chief who often sides with Schnabel and Nagel in policy debates, said he was keeping an open mind about rates beyond September but he would need a moderation in underlying price growth to stop hiking.
“Simply put, we would have to have a high level of certainty based on fresh data and estimates that we have core inflation under control in the nearest future,” Kazimir told reporters when asked what it would take for him to support a stop in rate increases.
(Reporting by Balazs Koranyi Editing by Alison Williams and Mark Potter)
