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ECB's Lagarde Signals Measured Approach to Inflation
Confirmed
In Short: European Central Bank President Christine Lagarde said the bank will take a measured approach to inflation, despite pressures from high energy prices.
European Central Bank President Christine Lagarde said Thursday that the bank will take a measured approach to inflation, despite pressures from high energy prices. Lagarde's remarks came after the ECB raised interest rates to cool inflation, which is above the bank’s target of 2% due to high oil prices from the Iran war.
Lagarde told reporters that the concept of the neutral interest rate is highly theoretical and designed for a world without shocks. She said inflation has so far come in lower than anticipated, notably for food, but would probably prove more persistent than expected.
Lagarde stressed that wages have so far shown no material response to the energy shock, leaving the ECB focused less on the initial price surge than on whether it begins spreading through wages and broader underlying inflation. She noted that long-term interest rates have “risen notably” since the last ECB meeting, which should slow growth and reduce inflation pass-through.
Traders will closely monitor key US inflation data, including the Producer Price Index (PPI) and Consumer Price Index (CPI), which will be published later this week. These reports may shed fresh light on the Federal Reserve’s (Fed) next steps at their September 14-15 meeting.
Lagarde will speak again on Tuesday at 11:00 GMT and on Thursday at 13:30 GMT, with 13 more ECB speeches scheduled before Friday's flash Harmonised Index of Consumer Prices (HICP) for September at 09:00 GMT.
What's confirmed
- Remarks by ECB President Christine Lagarde later Thursday will be parsed by market analysts and investors for clues about whether more interest rate increases are coming.
What's still developing
- Fed Chair Kevin Warsh has said the bank may have “more work to do” to contain U.S. inflation of 3.7%.
- Higher rates cool inflation by making it more expensive to borrow and buy things, from houses to new factories.
- The Governing Council said inflation was “set to remain well above target for an extended period” because of the conflict in the Middle East.
- Lagarde also urged EU institutions to agree the legal framework for the digital euro as quickly as possible.
- Lagarde gave no signal on the next move, repeating that decisions would be taken meeting by meeting.
- ECB President Christine Lagarde said in Brussels on Monday that the central bank remains on the “middle path” after raising interest rates by 25bp earlier this month, arguing that the energy shock is too large to ignore but has not yet become embedded deeply enough to justify a more forceful response.
- “We do not react to energy prices, we react if we see risks of higher energy prices becoming embedded in inflation,” Lagarde told the European Parliament’s Committee on Economic and Monetary Affairs.
- She said the ECB currently sees “higher inflation ahead but no signs yet that it is becoming embedded,” adding that a “measured response” remains appropriate.
- Unless energy pressure starts feeding more clearly into wages and core prices, higher market yields give the ECB room to keep its response measured.
- The latest inflation mix supports that distinction.
- Headline inflation rose from 2.9% to 3.2% in August, driven largely by energy inflation accelerating from 10.3% to 14.3%.
- By contrast, inflation excluding energy and food edged down to 2.4%, while compensation per employee slowed from 3.6% to 3.3% in Q2.