The European Central Bank calls on companies to reduce profit margins and confirms a rate hike in July

There is no room for lowering our guard, the European Central Bank will raise interest rates scheduled for July 27, despite the technical recession that has already touched Germany, and keeps open the possibility of further increases from September. However, he feels powerless to end inflation without the support of governments and corporations. President of the European Central Bank, Christine Lagarde, a new slap on the wrist today for governments that still maintain fiscal measures aimed at mitigating the burden of high energy prices, which in his opinion should be reversed as soon as possible because excessive public spending could run counter to the European Central Bank’s inflationary goals. And the companies warned that they should not raise wages too much, and above all, they should cut their profit margins, and enter areas that are in principle outside the limits of their competence, which is monetary policy.

This was also hinted at by the vice president of the European issuer, Luis de Guindos, who emphasized that although underlying inflationary pressures are finally easing across the eurozone, service price growth risks remaining flat. inflation growth Far from the 2% target. “While underlying price pressures remain strong, most indices are beginning to show some signs of weakness,” he acknowledged at a conference at King’s College London. Although still broad by historical standards, the range of measures of core inflation has recently begun to narrow.

However, de Guindos added that inflation is still very high, so the ECB’s job is far from over. “We can see that in the case of services they are more persistent,” he insisted basic indicators, «the rigidity of service inflation is much higher». De Guindos was referring to the fact that service prices are particularly sensitive to the evolution of wages and labor costs, which are growing very quickly, so the ECB will have to watch carefully whether the expected moderation in wage growth is achieved as expected by you. The technical team.

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Another issue preoccupying the ECB’s Governing Council is profit margins. His studies estimate that companies have raised prices beyond production costs and the European Central Bank now expects them to cut their margins and absorb part of The effect of higher wages. Christine Lagarde also spoke along these lines, in an interview published by the French newspaper “La Provence”, where she declared that she was waiting to see if companies would accept this reduction in their profits, “or if we would see a double increase: in margins and in salaries ».

He warned of this scenario, “a simultaneous increase in both fuels inflation risks, and in this case we will not stand idly by in the face of such risks.” The truth is that there are not a few outside analysts who doubt this margin pressure Business should be a benchmark in the ECB’s monetary policy decisions, and it is also an unpredictable variable. But for Lagarde, it makes sense.

The ECB’s Governing Council leans, as evidenced by Lagarde’s words and her number two, to the line advanced by the ECB president in various statements. Bundesbank German Joachim Nagel, and contrary to the opinion of the President of the Bank of Italy, Ignazio Fiesco, who at the beginning of this week called for caution and emphasized that he did not understand the arguments to “be a little more, rather than” a little less restrictive. It does not appear to have a majority within the Governing Council. While the southern end of the bloc is increasingly advocating a pause in rate hikes, the Hawks, who remain a comfortable majority, are not yet backing down, arguing that more evidence is needed that underlying pressures On the prices are falling.

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In this sense, de Guindos made a small concession, reckoning that the ECB’s previous interest rate hikes will continue to weigh on inflation in the years to come, since it takes time to transfer policy to the real economy, so it’s worth the prospect. than waiting for those effects to occur without Constantly raising rates. Because of the adjustment, inflation in 2022 was only half a percentage point lower than it would otherwise have been, while the downward effect is expected to average two percentage points over the period 2023-25.

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