Lagarde says moderate ECB policy response remains appropriate

European Central Bank President Christine Lagarde stated on Monday that moderate inflation in the euro zone, currently above 3% and potentially reaching 4% by the end of the year, does not yet pose a dangerous second-round effect. She dismissed more aggressive market forecasts of up to four additional interest rate hikes this year, following two in the summer.

Lagarde identified surging oil and gas prices from the US-Iran conflict as the main driver of the inflation surge. She noted that while higher inflation is expected, there is no evidence yet that energy prices are fueling wage increases. Lagarde emphasized that the shock to the economy is significant but not yet embedded, and therefore, a measured response is appropriate to maintain inflation control.

She acknowledged that risks are leaning towards higher inflation readings, and uncertainty remains high regarding the outlook. Economists suggest that the initial two rate hikes, spaced three months apart, provide a guideline for a measured response. Many economists anticipate the ECB will skip its scheduled October 29 meeting and implement a rate increase in December when new projections are released.

Lagarde maintained a positive outlook on the economy, highlighting that manufacturing is performing well, the labor market remains strong, and investment should support growth.