Lagarde warns of continued inflation in the euro zone and calls for a measured monetary response

European Central Bank President Christine Lagarde said on Monday that the rise in inflation in the euro zone still requires a “thoughtful” monetary response, at a time when the jump in oil and gas prices, linked to the US-Iran war, is pushing inflation to higher levels, but it has not yet shown signs of its entrenchment in wages and price expectations.

Lagarde said during a session before a committee in the European Parliament that inflation “will rise in the coming period,” but she added that there are still no signs of it turning into a sustainable wave, noting that there is no evidence that rising energy prices are transmitted to wage increases.

She added that the energy shock is “so large that it cannot be ignored,” but that does not justify, at the current stage, a sharp monetary response, saying that a “studied” response remains appropriate to keep inflation under control.

Eurozone inflation has exceeded 3 percent, with expectations that it will approach 4 percent by the end of the year, about double the European Central Bank's target of 2 percent. This led to an increase in market bets on further raising interest rates during the coming year, after two steps during the summer.

But Lagarde's statements seemed less stringent than some expectations in the markets, as she stressed that rising energy prices are the main driver of the current inflationary wave, while acknowledging that inflation risks tend to the upside and that the degree of uncertainty about the economic outlook is high.

Economists' estimates indicate that the European Central Bank may keep interest rates unchanged at its meeting scheduled for October 29, before raising them again in December, coinciding with the issuance of its new economic forecasts.

On the financial side, Lagarde said that the support provided by euro zone governments to offset rising energy costs is increasing, and that the measures have become less targeted and less temporary than policymakers had hoped.

She explained that financial support at the euro zone level is currently equivalent to about 0.1 percentage point of GDP, compared to about 0.03 point three months ago, adding that these measures “are not necessarily temporary nor necessarily targeted.”

On the economic front, Lagarde maintained a relatively optimistic tone, noting the strength of the manufacturing sector and labor market, in addition to her expectation that investment will support growth.

Regarding the issue of financial stability and the role of the euro, Lagarde said that the European Central Bank will work to develop new swap lines with foreign central banks, allowing them to obtain the euro and contributing to strengthening the strength of the European currency.

She said that the bank will work on swap lines that are “more responsive” to the need for a eurozone with stronger financial and monetary sovereignty, in a move aimed at enhancing the euro’s ability to perform its role in the global financial system.