Current inflation shock likely to last longer than expected: ECB president

By Zoe Schneeweiss and Mark Schroers

 

Euro-area inflation will stay elevated for some time, according to European Central Bank President Christine Lagarde.

 

“The current shock is longer-lasting,” she told Ouest-France in an interview. The conflict in the Middle East “is continuing. We expect the volatility and pressure on energy prices to continue, even though the increase in prices also poses a risk of lower growth.”

 

The ECB raised interest rates this week for the second time since the Iran war sent oil and gas prices soaring. Officials expect them to rise further to bring inflation, currently above 3%, back to 2%, people familiar with their discussions told Bloomberg on Thursday.

 

 

“There has been a major shock that will probably last longer than we had expected,” Lagarde said, according to the transcript of the interview published on the ECB’s website on Saturday. 

 

The Iran war and the “destruction of refining capacity around the world, especially in Russia” have “led to an increase in energy costs, and that drives all prices higher,” she said. “In this kind of situation, and as we also have a resilient economy, we are obliged to react.” 

 

Bundesbank President Joachim Nagel said Friday that the ECB may need to bring borrowing costs into mildly restrictive territory to get price growth under control. After Thursday’s move, the deposit rate stands at 2.5%, a level many, including Chief Economist Philip Lane, see as the upper end of the neutral range.

 

New ECB projections published Thursday showed faster inflation in 2027 and 2028, with the latter now slightly above target. Growth forecasts were also lifted, thanks to the resilience of the euro-area economy to the Middle East conflict and other headwinds such as US trade policies.

 

Lagarde also told Ouest-France: 

• “Asset valuations in the AI sector are very high. The various planned initial public offerings are proof of this.”
• “There is also an additional risk, which is currently being assessed: circularity risk, whereby one company acquires a stake in another, which then awards it a contract to supply microchips, etc.”
• “A correction is entirely possible. When? We don’t know. European banks hold AI-related assets but, as I said, our financial sector is a lot stronger than it used to be.”
• “France is one of the countries planning structural reforms, and it would be very important that it implements them.”
• She reiterated that a far-left proposal to reduce France’s mountain of borrowing by canceling debt held by central banks doesn’t make sense and would be “financially very dangerous.”
• Asked about entering the French presidential election as a candidate, she said “that’s flattering! But I don’t think so.”
• She also rejected the suggestion of returning to national politics after leaving the ECB: “I’ll be turning 71 soon, you know. You have to know when to call it a day.”
• She reiterated that she’ll leave the ECB next year, without commenting on whether that means she’ll serve out her term through the end of October 2027.