Lagarde sees no need for more forceful ECB response to war

[BRUSSELS) The European Central Bank doesn’t need to react more forcefully to the fallout from the Middle East conflict because inflation is set to return to target over the medium term, President Christine Lagarde said.

While households anticipate quicker consumer-price gains in the short term, they see them stabilising over longer periods, Lagarde told European lawmakers in Brussels. That gives the ECB confidence that inflation will fall back to 2 per cent from more than 3 per cent now “with appropriate monetary-policy action,” she said.

“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,” Lagarde said Monday (Jun 22).

Investors are assessing whether the ECB will add to its first rate hike since 2023, with officials warning that inflation is widening beyond just energy. Despite progress on a lasting peace between the US and Iran, markets expect at least one more quarter-point increase this year in the deposit rate, to 2.5 per cent.

Traders pared wagers after Lagarde spoke, with 33 basis points priced by year-end compared with 37 points before. German bonds jumped, sending the two-year yield six basis points lower to 2.59 per cent.

Lagarde welcomed last week’s pact in the Middle East but stressing the continuing fragility of the situation. She said the ECB is now somewhere between its baseline and mild scenarios for the economy, and must remain agile.

“We can adjust our response as the shock evolves and ensure it remains proportionate,” she said, acknowledging that there’s been “some de-anchoring” in short-term inflation expectations but that longer-term views are “broadly unchanged.”

Oil slid below US$80 a barrel on Monday as negotiators for Washington and Teheran agreed on a roadmap to reach a final deal, easing some pressure on policymakers.

Spain’s Jose Luis Escrivá said earlier in the day that the ECB must be “vigilant” to ensure there are no second-round effects on wages, which will depend on how persistent price growth proves to be.

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Data last week showed core inflation, which excludes energy and food, was even stronger in May that initially reported, accelerating to 2.6 per cent from 2.2 per cent in April.

“The shock is too large to look through without jeopardising our target,” Lagarde said. “We remain well positioned to navigate the uncertainty caused by the war.” BLOOMBERG