Lagarde says moderate ECB policy response remains appropriate

Investing.com -- European Central Bank President Christine Lagarde said Monday that this year's inflation has not yet created dangerous second round effects across the euro zone, making a moderate policy response from the central bank appropriate.

Euro zone inflation has exceeded 3% and may reach 4% by year-end, double the ECB's target. Market expectations now include up to four additional rate hikes over the next year, following two increases during the summer.

Lagarde pushed back against some of the more aggressive market expectations during a European Parliament committee hearing in Brussels. She said surging oil and gas prices from the US-Iran conflict are the primary cause of rising prices.

"We see higher inflation ahead but no signs yet that it is becoming embedded," Lagarde said. "We do not see evidence at this stage of energy prices feeding into higher wages."

"This means that while the shock is too large to look through, we view a measured response as appropriate to keep inflation in check," she added.

Lagarde acknowledged that risks lean toward higher inflation readings and uncertainty remains high around the outlook.

Economists view the first two rate hikes, which came three months apart, as a guide for what constitutes a "measured response." Many economists expect the ECB to skip its October 29 meeting and implement a rate increase in December when new projections are released.

Lagarde maintained a positive view on the economy, stating that manufacturing is performing solidly, the labor market remains strong, and investment should support growth.

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