Lagarde Warns Eurozone Inflation Shock Will Last Longer Than Expected

European Central Bank President Christine Lagarde warned that eurozone inflation shock will last longer than expected due to ongoing conflict in the Middle East and its impact on energy prices. In an interview, she said 'the current shock is longer-lasting' and pointed to the destruction of refining capacity, particularly in Russia, as a factor driving energy costs higher.

Lagarde's comments came after the ECB raised interest rates this week for the second time since the Iran war drove oil and gas prices sharply higher. The deposit rate now stands at 2.5%. Inflation in the euro area is currently above 3%, and policymakers expect further tightening may be needed to return price growth to the ECB's 2% target.

New ECB projections released Thursday raised inflation forecasts for 2027 and 2028, with price growth in 2028 now expected to sit slightly above the central bank's target. Bundesbank President Joachim Nagel said that borrowing costs may need to move into mildly restrictive territory to bring inflation under control.