ECB President Christine Lagarde told European lawmakers the central bank is sticking to a "middle path" on policy despite an energy-driven jump in inflation. She said rising market yields are already tightening financial conditions, giving the ECB room to avoid a more aggressive rate response unless wages start reflecting the energy shock.
Christine Lagarde told the European Parliament's Committee on Economic and Monetary Affairs on Monday that the European Central Bank remains on a "middle path" after raising interest rates by 25 basis points earlier this month. She argued the energy shock is too large to ignore, but has not yet become embedded deeply enough in the broader economy to justify a more forceful response.
Inflation mix backs the measured stance
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 the second quarter.
Lagarde said the ECB sees "higher inflation ahead but no signs yet that it is becoming embedded", adding that a measured response remains appropriate. Wages have so far shown no material response to the energy shock, so the central bank is watching for signs the shock spreads through wages and underlying prices rather than reacting to the initial price surge itself. The September projections still see headline inflation averaging 3.0% in 2026, 2.5% in 2027 and 2.1% in 2028, with risks tilted upward for inflation and downward for growth.
Market yields do part of the tightening
Lagarde noted that long-term interest rates have risen notably since the last ECB meeting, and said this should slow growth and reduce inflation pass-through by more than assumed in the September projections. As a result, higher market yields give the ECB room to keep its response measured rather than mechanically chasing every rise in energy prices.
The message is therefore cautiously hawkish rather than aggressively so: the ECB is unwilling to look through the energy shock, but it is equally unwilling to tighten further unless energy pressure feeds more clearly into wages and core prices.
Source: ActionForex
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