FRANKFURT: Euro-area inflation will stay elevated for some time, according to European Central Bank (ECB) President Christine Lagarde.
“The current shock is longer-lasting,” she told Ouest-France in an interview.
“The conflict in the Middle East is continuing.
“We expect the volatility and pressure on energy prices to continue, even though the increase in prices also poses a risk of lower growth.”
The ECB raised interest rates this week for the second time since the Iran war sent oil and gas prices soaring.
Officials expect them to rise further to bring inflation, currently above 3%, back to 2%, people familiar with their discussions told Bloomberg last Thursday.
“There has been a major shock that will probably last longer than we had expected,” Lagarde said, according to the transcript of the interview published on the ECB’s website last Saturday.
The Iran war and the “destruction of refining capacity around the world, especially in Russia” have “led to an increase in energy costs, and that drives all prices higher,” she said.
“In this kind of situation, and as we also have a resilient economy, we are obliged to react.”
Bundesbank President Joachim Nagel said last Friday that the ECB may need to bring borrowing costs into mildly restrictive territory to get price growth under control.
After last Thursday’s move, the deposit rate stands at 2.5%, a level many, including chief economist Philip Lane, see as the upper end of the neutral range.
New ECB projections published last Thursday showed faster inflation in 2027 and 2028, with the latter now slightly above target.
Growth forecasts were also lifted, thanks to the resilience of the euro-area economy to the Middle East conflict and other headwinds such as US trade policies. — Bloomberg
