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

FRANKFURT (Reuters) – Europe’s sluggish productivity growth may slow the fall in inflation to the European Central Bank’s 2% target, ECB policymaker Isabel Schnabel said on Friday.

Schnabel pointed to a number of factors behind the euro zone’s long-running economic underperformance versus the United States, including lower investment in technology, more red tape and more expensive energy.

She argued this could delay the ECB’s victory against high inflation and the timing of its first interest rate cut.

“Persistently low, and recently even negative, productivity growth exacerbates the effects that the current strong growth in nominal wages has on unit labour costs for firms,” she told an event in Florence, Italy. “This increases the risk that firms may pass higher wage costs on to consumers, which could delay inflation returning to our 2% target.”

Reaffirming her stance, Schnabel said this meant the ECB had to be “cautious” and not cut rates “prematurely” to avoid a second flare-up in inflation as happened in the 1970s.

She said making it easier to open and scale-up successful businesses and wind-down failing ones were among measures that could be taken to boost euro zone productivity.

Higher productivity would make life easier for the ECB in avoiding both periods of too high and too low inflation, Schnabel said.

“Measures that help firms boost productivity growth directly support monetary policy in achieving its objective of securing price stability over the medium term,” Schnabel said.