Lagarde Stands Firm on Rate Hikes Amid Rising Inflation Concerns

Christine Lagarde, President of the European Central Bank (ECB), defended the recent increase in interest rates during a hearing before the Economic and Monetary Affairs Committee of the European Parliament. She emphasized that a 'measured response' is necessary to keep inflation under control.

Lagarde stated that the ECB's new projections indicate higher inflation in 2027 and 2028 than previously expected. However, she noted that there is currently no clear evidence that this increase will become structurally entrenched.

The ECB leader acknowledged that the rising cost of money will have negative effects on economic activity. She warned that while growth has been 'solid,' tightening monetary policy and increasing long-term yields will ultimately moderate economic dynamism and reduce the transmission of corporate profits.

Lagarde highlighted the importance of monitoring the impact of artificial intelligence (AI) on productivity, investment, labor markets, financial conditions, and inflation. She noted that AI could boost productivity by 0.3% to 0.4% annually over the next decade, which is somewhat less optimistic than US forecasts.