Lagarde sees no wider inflation spillover as energy prices surge

Traders Union
All News
Central Banks
ECB monitors inflation risks

Highlights

ECB sees no inflation spillover.
December rate hike is expected.
French bond yields add pressure.

Speaking at a CNN event during the International Monetary Fund's annual meeting in Bangkok, Lagarde said officials were monitoring whether higher energy prices were spreading into wages, consumer prices, and inflation expectations, Bloomberg reports. So far, the ECB has found no evidence of significant second-round effects, although policymakers remain alert to early signs of broader price pressures.

December rate hike remains in focus

The ECB has raised interest rates twice this year in response to an inflation surge driven largely by the Middle East conflict. While energy costs have pushed headline inflation toward 4%, wage growth and medium-term inflation expectations have not shown the same deterioration.

Chief Economist Philip Lane has argued that a measured policy response may be sufficient to restore price stability. Lagarde has maintained that future decisions will depend on incoming economic data, with the ECB continuing to target inflation of 2% over the medium term.

Investors and economists increasingly expect another increase in December, potentially lifting the deposit rate to 2.75%. New economic projections at that meeting will assess how the conflict affects inflation and growth through 2028.

Belgian central bank Governor Pierre Wunsch also considers further tightening likely, although he has not committed to October or December. Uncertainty over energy prices remains a major obstacle to setting a clear policy timetable.

French bond turmoil complicates ECB policy

The inflation debate is unfolding alongside growing concerns about France's public finances. Investors have sold French government bonds amid doubts about the country's ability to reduce its budget deficit, pushing borrowing costs higher and adding pressure to other heavily indebted euro-area economies.

The market turbulence has renewed attention on the ECB's Transmission Protection Instrument, introduced in 2022 to counter disorderly movements in sovereign bond markets. However, officials have indicated that current conditions do not justify intervention, particularly when higher yields partly reflect legitimate concerns about fiscal policy.

Bank of France Governor Emmanuel Moulin has warned that tighter financial conditions could weaken demand, potentially reducing the need for additional monetary tightening.

Higher borrowing costs reshape the outlook

The ECB faces competing risks: persistent energy inflation could eventually push wages and underlying prices higher, while tighter credit conditions could restrain growth before those effects emerge.

A December increase to 2.75% would take the deposit rate into territory economists consider restrictive. Yet higher sovereign yields are already raising financing costs for governments, businesses, and households.

For investors, the distinction matters. If inflation expectations remain anchored near the ECB's 2% target, policymakers may have room to respond gradually. A broader acceleration in wages or consumer prices would strengthen the case for further rate increases, even as Europe's fiscal pressures intensify.

Earlier, we reported that ECB opens a race to replace Isabel Schnabel.

This material may contain third-party opinions, none of the data and information on this webpage constitutes investment advice according to our Disclaimer. While we adhere to strict Editorial Integrity, this post may contain references to products from our partners.