ECB’s Lagarde says inflation shock warrants measured response

Investing.com -- European Central Bank President Christine Lagarde said today that the inflation shock in the euro zone requires action but does not yet show signs of dangerous second-round effects or unanchored price expectations.

The ECB raised interest rates earlier this month after inflation rose above 3%. Investors are now watching whether the bank will move again to contain price pressures and prevent expectations from moving away from its 2% target.

Lagarde told a European Parliament committee hearing that the currency bloc is experiencing a not-too-persistent overshoot that requires some measured policy adjustment.

"For now, we are in the second case," Lagarde said. "The shock is too large to look through without jeopardising our target."

"But we see no evidence yet of de-anchoring of inflation expectations or second-round effects that would warrant a more forceful policy response at this stage," she added.

The current shock appears to be smaller than the 2021/22 episode when the bank raised rates at a record pace, she said. The context is also different given a stronger labour market, higher incomes and post-pandemic supply challenges.

The ECB must not be complacent because wage formation may be more sensitive to new shocks given the bloc's recent experience with high inflation, Lagarde said.

Lagarde said investment, particularly into AI, was holding up and households had strong balance sheets, providing some cushion for an economy still affected by higher energy costs.

"The outlook remains uncertain, with upside risks for inflation and downside risks for economic growth," Lagarde said.

She added that the Iran war is weighing on activity, with data pointing to a slowdown, especially in services.

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