Lagarde: War Presents Substantial Risks To Inflation Outlook

Lagarde opening comments continue:

• Labour market conditions have continued to improve. Wage growth remains muted overall despite labour shortages. Over time the movement towards full capacity will underpin wage growth.
• The risks to the economic outlook have increased substantially given the war and are tilted to the downside. The war could worsen supply side constraints and damage sentiment. The loss of confidence and higher energy prices could constrain consumption and investment.
• The same factors are risks to the outlook to the inflation, which are to the upside in the near term. The war is a substantial upside risk, especially to inflation. If price pressures feed through to higher than expected wages, inflation could also turn out to be higher over the medium term. However, if demand were to weaken over the medium term, this could lower pressure on prices.
• The war has caused volatility in markets. Risk free market rates have partially reversed the increase observed since February. Financial sanctions have so far not caused severe strains in money markets or liquidity shortages in the euro area. Bank balance sheets remain healthy given few NPLs and strong capitalisation. Banks are profitable as they were before the pandemic.