ECB’s Lagarde: The current shock is longer-lasting

ECB President Christine Lagarde has warned in an interview that the ongoing energy shock is more prolonged than initially anticipated. She emphasized the "continuing conflict," and stated that the ECB anticipates persistent volatility and pressure on energy prices, despite the risk of slower growth. The ECB's primary objective is to maintain price stability, a goal that remains challenging as the euro area's inflation stands at 3.3%, well above the 2% target.

Lagarde stressed that the current European conflict could keep energy markets unpredictable and prices high. The central bank must consider the entire euro area, not just individual nations like France, Lithuania, or Germany. Furthermore, Lagarde called for simplifying administrative regulations at both the European and French levels.

The rise in long-term interest rates is attributed to factors such as overall public finances, particularly in the United States, and the funding demands of economic actors, especially those involved in artificial intelligence. Lagarde, who plans to step down in 2027, expressed a slightly more hawkish sentiment in her speech. The Euro (EUR) underperformed its major currency peers throughout the week, with the EUR/USD pair declining 0.37% to nearly 1.1556.

Despite the Euro's relative weakness, Lagarde's focus on the volatile energy market due to the Middle East conflict, rising long-term rates linked to public finances and AI funding needs, and the reminder of the ECB's obligation to serve the entire Euro area rather than individual countries, suggest that the central bank will remain cautious about easing monetary policy, potentially supporting the Euro in the long run.