Christine Lagarde said “strong spending on holidays and travel” and higher wages had slowed price declines even as the economy continued to slow. Annual inflation in the euro zone fell only slightly from 5.2 percent in July to 5.3 percent in August.
“We remain determined to ensure that inflation returns to our 2 percent target in the medium term in due course,” Lagarde told the European Parliament’s Economic and Monetary Affairs Committee.
“Inflation continues to decline but is expected to remain very high for a long period,” she added.
“We consider that our official interest rates have reached levels that, if maintained for a sufficiently long period, will make a significant contribution to the timely return of inflation to our target,” Lagarde said.
But Lagarde highlighted some modest decline in the flexible labor market, which is expected to help combat inflation after rapid nominal wage growth put pressure on prices.
“The labor market is finally adjusting and may take more time to adapt,” she told the European Parliament’s Economic and Monetary Affairs Committee. “Job creation in the service sector is moderating and overall momentum is slowing.”
Last week, the European Central Bank raised its benchmark deposit interest rate to an all-time high of 4 percent, after a record pace of increases from minus 0.5 percent in July 2022.
Analysts believe that the European Central Bank may have finished raising interest rates given signs of increasing weakness in the European economy.
Markets do not see any further increases in European interest rates on the basis that concerns about an economic slowdown will become a bigger concern than inflation.
Other central banks, including the Bank of England and the US Federal Reserve, halted interest rate increases last week as they neared the end of their rapid rate hike campaigns.
High interest rates imposed by the European Central Bank sparked a sharp slowdown in property and construction deals – which are highly sensitive to credit costs – and ended years of rising house prices in the euro zone.
Lagarde said the economy “experienced a broad recession” in the first six months of this year, and incoming data indicate “further weakness” in the third quarter, extending from July to September.
Lagarde cited European Central Bank forecasts that expect the economy to rebound as inflation declines, giving individuals more purchasing power.
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