The character of the inflation drawback within the eurozone is altering, and rates of interest will have to be increased for longer than policymakers and traders as soon as estimated, Christine Lagarde, the president of the European Central Financial institution, mentioned on Tuesday.

Whereas the shocks that pushed the area’s inflation fee above 10 % late final yr, reminiscent of provide chain bottlenecks throughout the pandemic and the surge in power costs after Russia’s invasion of Ukraine, have began to wane, their influence continues to be passing via the economic system. That’s making inflation extra persistent, Ms. Lagarde mentioned on the central financial institution’s tenth annual convention in Sintra, Portugal.

The slower decline in inflation “is attributable to the truth that inflation is working its manner via the economic system in phases, as totally different financial brokers attempt to go the prices on to one another,” Ms. Lagarde mentioned. Firms have handed on prices to prospects, and now employees are attempting to catch up from misplaced wages attributable to excessive costs.

Central bankers from throughout Europe and additional afield, from Canada to South Africa, together with Chair Jerome H. Powell of the Federal Reserve and Andrew Bailey, governor of the Financial institution of England, have gathered in Sintra at a difficult time for policymakers as they battle to deliver inflation down with out inflicting pointless financial ache.

Central banks all over the world have aggressively raised rates of interest, and whereas the total influence of those strikes has not been felt but in numerous economies, policymakers are attempting to find out if they’ve a deal with on the inflation drawback.

Earlier this month, the European Central Financial institution, which units coverage for the 20 nations that use the euro foreign money, raised rates of interest to their highest stage since 2001 and mentioned extra will increase had been prone to observe. Shopper costs within the eurozone rose 6.1 % in Might from a yr earlier, the slowest tempo in additional than a yr. However policymakers are nonetheless involved about core inflation, which strips out meals and power costs, and is one option to measure how deeply worth pressures are embedding within the economic system. That measure declined to five.3 % in Might, from 5.6 % the earlier month.

The central financial institution “must deliver charges to sufficiently restrictive ranges and maintain them there for so long as mandatory,” Ms. Lagarde mentioned on Tuesday.

For inflation within the eurozone to return to the central financial institution’s goal of two %, corporations have to soak up increased wage prices and settle for decrease revenue margins, she added.

Final yr, corporations had been capable of go on increased prices rapidly, partly as a result of prospects had been unable to discern whether or not increased costs had been being attributable to excessive firm prices or the pursuit of larger income, she mentioned. And so income contributed about two-thirds to home inflation, in contrast with one-third, which was the common over the earlier twenty years.

Staff at the moment are searching for increased pay to make up their misplaced buying energy. The central financial institution expects wages to rise 14 % by the top of 2025 as they return to prepandemic ranges, as soon as adjusted for inflation.

Inflation will be pushed down, and employees could make up some misplaced wages, if financial coverage is restrictive sufficient, Ms. Lagarde mentioned. For this to work, coverage must restrain the economic system by dampening demand so corporations can’t utterly go on the price of increased wages to their prospects. If that doesn’t occur, inflation will stay stubbornly excessive.

The central financial institution might want to have “extra persistent coverage” to sort out indicators of longer-lasting inflation, Ms. Lagarde mentioned. Which means holding rates of interest at restrictive ranges till policymakers are certain that the wage catch-up has been resolved.

“Now we have made vital progress,” Ms. Lagarde mentioned. “However confronted with a extra persistent inflation course of, we can not waver, and we can not declare victory but.”

The central financial institution gained’t be capable of say within the close to time period with confidence whether or not the height in rates of interest has been reached, she added.

The night earlier than, central bankers got a stern warning from the Worldwide Financial Fund. “Inflation is taking too lengthy to get again to focus on,” Gita Gopinath, the primary deputy managing director of the group, mentioned in a speech.

Ms. Gopinath set the tone for the convention, which runs via Wednesday, arguing that central banks wanted to go additional to deliver down inflation, regardless of the financial prices.

Even with the actions world central banks have taken, “the battle gained’t be simple,” Ms. Gopinath mentioned. “Monetary stresses could intensify, and progress could should sluggish extra.”