Euro hits 1-month high after Lagarde, Nagel warn on inflation risks

By Geoffrey Smith 

Investing.com -- The euro hit its highest level in over a month on Wednesday after European Central Bank officials warned that inflation pressure is still too strong to allow any talk of loosening policy in the near term.

By 08:30 ET (12:30 GMT), the euro was at $1.0790, just off an intraday peak of $1.08.

"Even though inflation has likely passed its peak, it is descending from very high levels, and it is projected to be too far above our target for too long," ECB President Christine Lagarde said in a speech. "The longer inflation is too high, the greater the danger that it remains so." 

Lagarde was giving the keynote speech at a conference hosted by the ECB itself for the economists that track it most closely. The ECB has usually used the conference to amplify communication of its policy goals to financial markets. 

In a speech that made few concessions to the risk of financial instability derailing the Eurozone economy, Lagarde argued that the improvement in headline inflation over recent months has flattered the underlying trend, Core inflation, which strips out volatile food and energy prices, accelerated to a euro-era record of 5.6% in February, more than double its previous record high in 2008.  

Various measures of underlying inflation tracked by the ECB put the rate as high as 8%, Lagarde noted. Headline inflation by contrast has eased to 8.5% in February from a peak of 10.6% in October.

Lagarde devoted a large part of her speech to analyzing the respective influence of wages and corporate profit margins in driving inflation over the last couple of years. Notably, she warned both workers and companies to accept that the eurozone economy has been permanently weakened by last year's energy price spike. 

"The euro area has suffered a large terms-of-trade loss owing to rising energy prices, the cost of which must ultimately be shared between firms and workers," Lagarde said. "It is important that there is fair burden sharing between them, with both accepting that they cannot fully recover the income that the euro area has paid to the rest of the world and the ensuing loss of output." 

Lagarde warned that, in contrast to the U.S., where pandemic-era savings have been largely run down, Eurozone households are still sitting on around €900 billion in excess savings built up between 2020 and 2022, which are likely to provide a tailwind to inflation for some time yet.

Elsewhere in her speech, the ECB president repeated that "There is no trade-off between price stability and financial stability," a line that ran like a thread through her press conference last week after the ECB raised its key interest rates by 50 basis points, bringing its key deposit rate to 3%. She insisted that the ECB had the necessary tools to defend the region's financial system from collapses in the U.S. and Switzerland.

Her comments were echoed in an interview with German central bank chief Joachim Nagel published by the Financial Times on Wednesday. 

“We are not facing a repeat of the financial crisis we saw in 2008,” Nagel said. “We can manage this.” 

Nagel said it was too early to conclude that the collapse of Credit Suisse and Silicon Valley Bank, among others, would lead to a credit crunch in the Eurozone, although he acknowledged that banks might tighten their lending conditions, in effect doing the ECB's job for it.