Lagarde Backs Measured Rate Hikes Amid Euro Zone Inflation Surge

European Central Bank President Christine Lagarde is pushing back against expectations for aggressive interest rate increases as euro zone inflation heads toward 4%. The ECB has already raised rates twice this summer, including a quarter-point increase in early October that lifted its deposit rate to 2.5%.

Lagarde signalled during a European Parliament committee hearing in Brussels that policymakers currently see a more gradual approach as appropriate. The key issue for the ECB is no longer simply whether energy prices are rising, but rather whether the shock is spreading into wages and broader price-setting across the economy.

Lagarde sees no dangerous second-round inflation effects yet, saying the ECB expects inflation to remain elevated but has not yet seen evidence that the latest price shock is becoming entrenched. The current inflation surge has been heavily influenced by energy prices following the conflict involving the United States and Iran. Monetary policy cannot directly increase the supply of oil or gas, meaning higher interest rates have limited ability to address the original cause of an energy shock.