Euro zone’s low productivity may slow inflation’s fall

FRANKFURT (Reuters) – Europe’s slow efficiency development might slow the fall in inflation to the European Central Bank’s 2% target, ECB policymaker Isabel Schnabel stated on Friday.

Schnabel indicated a variety of aspects behind the euro zone’s long-running financial underperformance versus the United States, consisting of lower financial investment in innovation, more bureaucracy and more costly energy.

She argued this might postpone the ECB’s success versus high inflation and the timing of its very first rates of interest cut.

“Persistently low, and just recently even unfavorable, performance development worsens the results that the existing strong development in small incomes has on system labour expenses for companies,” she informed an occasion in Florence, Italy. “This increases the threat that companies might pass greater wage expenses on to customers, which might postpone inflation going back to our 2% target.”

Declaring her position, Schnabel stated this implied the ECB needed to be “careful” and not cut rates “too soon” to prevent a 2nd flare-up in inflation as occurred in the 1970s.

She stated making it simpler to open and scale-up effective organizations and wind-down stopping working ones were amongst steps that might be required to enhance euro zone performance.

Greater efficiency would make life simpler for the ECB in preventing both durations of too expensive and too low inflation, Schnabel stated.

“Measures that assist companies enhance efficiency development straight support financial policy in accomplishing its goal of protecting rate stability over the medium term,” Schnabel stated.