The European Central Bank (ECB) has signaled its willingness to increase interest rates even if a projected rise in inflation proves to be temporary, according to President Christine Lagarde.
Lagarde's Stance on Rate Hikes
Lagarde indicated that a "not-too-persistent" overshoot of the ECB's inflation target could trigger a rate hike. She warned that failing to address such an overshoot might lead to communication risks, as the public could misunderstand a non-reactive policy stance.
Inflation Forecasts Amid Iran Conflict
The ECB updated its inflation projections due to the Iran conflict's impact on energy prices:
- Baseline scenario: Headline inflation averages 2.6% in 2026, 2% in 2027, and 2.1% in 2028.
- Adverse scenario: Inflation could peak at 4% in 2025.
- Severe scenario: Assuming stronger and persistent energy shocks, inflation might peak above 6% early next year.
Economic Indicators and Monitoring
ECB Chief Economist Philip Lane said the bank will monitor key indicators, including companies' price-hike expectations and wages for new hires. Additionally, private sector output in the euro zone dropped to a 10-month low in March, according to S&P Global flash PMI data, highlighting the war's negative effect on business activity.
Current Monetary Policy
The ECB recently kept its key deposit rate unchanged at 2%. The updated forecasts reflect the central bank's assessment of ongoing geopolitical tensions affecting inflation dynamics.