Eurozone Inflation Shock to Last Longer Amid Ongoing Conflict

European Central Bank (ECB) President Christine Lagarde stated that the eurozone's current inflation shock will persist longer than anticipated. The ECB raised interest rates for the second time this week, with the deposit rate now standing at 2.5%. Inflation in the euro area is currently above 3%, prompting policymakers to tighten monetary policy further.

Lagarde attributed the prolonged energy costs to the ongoing Middle East conflict and the destruction of refining capacity, particularly in Russia. She emphasized that the resilience of the euro-area economy necessitates a response to inflationary pressure. The ECB's projections indicate higher inflation forecasts for 2027 and 2028, with price growth expected to surpass its 2% target.

Bundesbank President Joachim Nagel cautioned that borrowing costs may need to enter mildly restrictive territory to bring inflation under control. Lagarde also expressed concerns about elevated valuations in the artificial intelligence sector, suggesting a market correction is possible due to risks associated with companies investing in one another and awarding contracts for products like semiconductors.