European Central Bank President Christine Lagarde told Ouest-France that "The current shock is longer-lasting," with the Middle East conflict still unfolding. She said the ECB expects energy-price turbulence and pressure to persist, even as higher prices risk weighing on growth. The interview transcript was posted by the ECB on Saturday.
Lagarde also said, "There has been a major shock that will probably last longer than we had expected." Citing the Iran war and the "destruction of refining capacity around the world, especially in Russia," she added that these factors have "led to an increase in energy costs, and that drives all prices higher." Her takeaway: "In this kind of situation, and as we also have a resilient economy, we are obliged to react."
The central bank lifted borrowing costs this week - marking a second increase since the Iran war drove oil and gas costs sharply higher. People familiar with the ECB's discussions told Bloomberg on Thursday that officials anticipate more increases aimed at returning inflation, which is currently above 3%, to 2%.
Many, including Chief Economist Philip Lane, regard that level as about the top of the neutral range. On Friday, Bundesbank President Joachim Nagel said borrowing costs may have to move into mildly restrictive territory to tame price growth.
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New projections released Thursday indicate quicker inflation in 2027 and 2028, with 2028 now slightly above the ECB's goal. Growth forecasts were also upgraded, highlighting the euro area's resilience despite the Middle East conflict and additional drags such as US trade policies.
Inflation in the euro area is still above 3%, and Lagarde's message suggests energy-related pressures could hang around. That helps explain why rates have already moved up and why officials see more tightening ahead. These are the forces that may shape how inflation and higher rates ripple through portfolios over the next few years.
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