ECB stuck between a rock (inflation) and a hard place (low growth)
· EUobserver‘The reason we are not hiking today is that we do not see second round effects,’ said ECB chief Christine Lagarde
ECB stuck between a rock (inflation) and a hard place (low growth)
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By Wester van Gaal,
Amsterdam
,
The European Central Bank kept its main interest rates unchanged on Thursday (30 April), despite a fresh jump in inflation driven by surging energy prices.
Headline inflation rose to three percent in April, up from 1.9 percent in February before the war started, with energy prices doing most of the work. Energy inflation alone jumped 10.9 percent this month.
But the governing council still opted against raising borrowing costs, because the same shock is also dragging down economic growth.
“The conflict is already weighing on economic activity,” ECB president Christine Lagarde told the press.
“High energy costs weigh on incomes of households and businesses, making them reluctant to consume and invest. Labour demand has cooled further,” she also said.
Hiking rates could help contain inflation, but would also push already weak growth — just 0.1 percent in the first quarter — down even further.
“We debated at length and in depth various options, including the possibility to hike,” said Lagarde. “The reason we are not hiking today is that we do not see second round effects.”
Second round effects usually refer to rising wage demands, and Lagarde told press that there is no “intention on part of corporate leaders to significantly increase wages.”
Once wage demands start chasing prices, inflation becomes much harder to control, which is why that is one of the most important determinants of ECB monetary policy.
Similar worries drove the ECB to raise rates in 2022. The OECD later found that the so-called wage-price spiral never materialised.
‘Greedflation’
What did materialise was inflation related to profits described in some media as ‘greedflation’. Companies used the energy shock to raise prices beyond what was needed to cover higher costs.
Lagarde herself later admitted, in 2023, that corporate profits “contributed around two-thirds to domestic inflation”, roughly twice the usual share.
Now, the same pattern seems to be reappearing.
Oil majors are again reporting sharp profit increases. TotalEnergies posted a 29 percent rise in quarterly profit to $5.4bn (€5.0bn), driven by higher prices linked to the Iran war.
BP reported $3.2bn in profits, more than doubling year-on-year, and Repsol’s profits jumped 57 percent, with refining margins more than doubling.
Oxfam estimates the biggest oil firms are on track to make $94bn in profits in 2026, higher than last year.
The relationship between profits and inflation were not mentioned in the ECB’s written monetary policy decision.
But Lagarde said she “should have mentioned” that “selling price revisions will be taken into account”, without spelling out exactly how.
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‘The reason we are not hiking today is that we do not see second round effects,’ said ECB chief Christine Lagarde
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Author Bio
Wester van Gaal is our economics editor. He joined EUobserver in September 2021. Previously, he was editor-in-chief of Motherboard, Vice Media’s technology and science website, and worked as a climate economy journalist for The Correspondent. He is based in Amsterdam, the Netherlands.