Rising wages are unlikely to exacerbate price rises next year, the head of the European Central bank said on Monday.
Christine Lagarde also insisted the ECB would not raise interest rates in 2022, despite market expectations the Frankfurt could move sooner to counter higher-than-expected inflation. She said even hinting at a rise would “hurt the economy”.
“It is simply not in the cards,” she told MEPs in Brussels via video link on Monday morning. “If we were to take any tightening measures now, it could cause far more harm than it would do any good in the face of spike inflation.
"To even hint to tightening in the short term would actually hurt the economy and would begin to have effect at a time when inflation begins to come down, so it’s best to actually nurture now and make sure we can deliver those favourable financing conditions in order to support the recovery.”
She said she would not “venture into” predictions for 2023 but insisted a rate rise would not take place next year.
Her comments come after prices rose to over 4pc in the eurozone and over 5pc in Ireland last month, with job site Indeed saying on Monday that shortages in the retail and hospitality sectors could lead to higher wage demands next year.
During a video debate with MEPs on Monday, Ms Lagarde said the main reasons for the price spike were a hike in energy costs, supply shortages caused by a release of pent-up pandemic demand and a temporary German VAT hike that should wash out in January.
She told deputies in the European Parliament’s economic affairs committee that while “inflation may remain higher for longer than we currently anticipated” there was “no evidence” that it would feed into higher wages and even higher prices.
ECB data shows wage growth of 1.7pc in the second quarter, compared to 1.4pc in the first, due largely to a German Covid payment to workers.
The ECB expects wages to rise “somewhat more than this year” in 2022 as they pick up the post-pandemic slack.
However, Ms Lagarde said there are enough workers to fill available jobs, despite labour shortages in retail and hospitality.
"We believe that there is sufficient slack in the economy, in terms of labour availability, to not have significantly higher wage increases going forward that would possibly lead to this second-round effect,” she said.
She said a rise in housing prices was not evident across the eurozone, although Ireland and the Netherlands were a “case in point”.
Costs are being driven up by more prudent bank lending and regulatory requirements, as well as a supply crunch, Ms Lagarde insisted, which she said was a job for governments to address.
“What we are seeing is banks taking a much closer look at risks,” she told MEPs.
“There is a supply issue and in quite a few countries, those supply issues have to be addressed, and have to be addressed head-on by the fiscal authorities.”
The ECB’s next rate-setting meeting takes place on December 16, when the Bank will also announce how it intends to phase out its emergency bond buying programme.