ECB signals measured rate response as inflation pressures ease

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ECB signals measured rate response

Highlights

ECB President Lagarde states policymakers can now implement incremental rate changes, shifting away from the aggressive hikes of 2022 and 2023.
The ECB increased rates by 0.25 percentage points to 2.25 per cent in June, aiming to bring inflation down from 3.2 per cent in May to 2 per cent by 2027.
Lagarde highlights the euro area's resilience to Middle East supply shocks and major U.S. tariff hikes, with updated projections showing minimal forecasting errors.

Sintra remarks frame post-crisis rate strategy

As reported by Financial Times, Lagarde says at the ECB’s annual Sintra conference that policymakers can now make measured adjustments to rates, calibrated to the shocks they face, rather than repeat the forceful response used when inflation surged in 2022 and 2023.

Her remarks come two weeks after the ECB raises rates for the first time in nearly three years, lifting borrowing costs by a quarter point to 2.25 per cent in June after inflation reaches 3.2 per cent in May. Lagarde says the move is not an “insurance hike” against possible future inflation, but a decision justified under every scenario considered by the central bank.

She adds that without the June increase, inflation would have remained above the ECB’s 2 per cent target in both 2027 and 2028. The June baseline projection from ECB staff shows inflation falling to 2 per cent during 2027, and Lagarde says the drop in oil prices since the ceasefire extension between the U.S. and Iran has not changed that assessment.

Euro area resilience shapes policy outlook

Lagarde says the ECB has moved beyond the financial crisis-era toolkit that dominated monetary policy for more than a decade, with interest rates once again serving as the central bank’s main instrument. She also says the ECB no longer needs complex forms of forward guidance, stressing that decisions are data dependent and taken meeting by meeting.

Markets still expect one further quarter-point increase by October, according to Reuters calculations, though Lagarde gives no direct guidance on the next move. She says the ECB’s forecasts have improved significantly after adopting more granular projections for oil, gas and electricity, adding that projection errors since the outbreak of the war in the Middle East have been very small.

For the euro area, the comments suggest policymakers see inflation risks as more manageable even after the Middle East energy shock. Lagarde says the region has withstood the largest U.S. tariff increase in almost a century and what the International Energy Agency calls the largest oil supply disruption in history, arguing that while the costs are substantial, the economy has not been derailed.

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