Lagarde Defends ECB's Measured Inflation Response Amid Higher Interest Rate Bets

European Central Bank (ECB) president Christine Lagarde has defended the central bank's measured response to this year's inflation surge, which has driven euro zone inflation above 3% and is forecast to reach as high as 4% by year-end.

Lagarde told a European Parliament committee hearing in Brussels on Monday that the current inflationary pressures are largely driven by surging oil and gas prices stemming from the US-Iran conflict, rather than second-round effects such as higher wages.

The ECB chief argued that while inflation is expected to rise further, there is currently no evidence of it becoming 'embedded' in the economy. As a result, she believes a moderate policy response remains appropriate to keep inflation under control.

Lagarde's comments come amid market expectations that up to four more rate hikes may be needed by the ECB in the next year, on top of two moves over the summer. However, she appeared to push back against some of these aggressive bets, highlighting the importance of a 'measured response'.

Economists say this implies that the ECB is likely to sit out its October 29 meeting and only hike interest rates in December, when new projections are released. Lagarde also reiterated her earlier message that interest rates will not move in lockstep with energy costs.