ECB Lagarde Warns Eurozone Inflation Shock Will Persist

European Central Bank President Christine Lagarde stated that the current inflation shock in the euro area is longer-lasting than previous episodes. She made this assessment in an interview with Ouest-France published on Saturday. Lagarde noted that the duration of the price pressure remains a critical concern for policymakers.

The ECB raised its deposit rate to 2.5% this week. This marks the second consecutive rate hike since geopolitical tensions drove energy prices higher. Inflation in the euro area currently stands above 3%. The central bank’s target remains at 2%.

Energy Costs Drive Price Pressures

Lagarde identified the Middle East conflict as a primary driver of elevated energy costs. She highlighted the destruction of refining capacity in Russia as a key factor. These supply-side constraints keep energy markets volatile. Higher costs threaten to slow economic growth.

The ECB released new projections on Thursday. These forecasts raised inflation expectations for 2027 and 2028. Price growth in 2028 is now expected to sit slightly above the central bank’s target. Growth projections were also increased due to the economy’s resilience.

Policy Makers Signal Restrictive Stance

Bundesbank President Joachim Nagel stated that borrowing costs may need to move into mildly restrictive territory. He argued this move is necessary to bring inflation under control. Lagarde agreed that the resilience of the euro-area economy requires a firm response to inflationary pressure. Policymakers expect further tightening may be needed.

Lagarde addressed risks in the artificial intelligence sector. She noted that elevated valuations make a market correction possible. She cited risks linked to companies investing in one another. These investments often involve contracts for products such as semiconductors.

French Reforms and Leadership Transition

Lagarde called for planned structural reforms in France to be implemented. She opposed proposals to cancel government debt held by central banks. She described such a move as financially dangerous. Lagarde also played down the prospect of running in France’s presidential election.

She reiterated her plan to leave the ECB next year. She did not specify if she will complete her term through October 2027. The source for this market analysis is GN markets/inflation (en-US). The central bank continues to monitor the impact of global trade policies.