Lagarde Warns of Longer-Lasting Inflation Shock Amid Middle East Conflict

European Central Bank President Christine Lagarde stated that the ongoing inflation shock will be longer-lasting due to the Middle East conflict and its impact on energy prices. The current inflation rate is above 3%, and Lagarde expects volatility and pressure on energy prices to continue, posing a risk of lower growth.

The ECB raised interest rates for the second time since the Iran war broke out in February, responding to signs that inflation will stay well above 2%. Lagarde said there has been a major shock that will probably last longer than expected, referencing the destruction of refining capacity around the world, especially in Russia. This increase in energy costs drives all prices higher.

The Bundesbank President Joachim Nagel stated that the ECB may need to bring borrowing costs into mildly restrictive territory to get price growth under control. The deposit rate now stands at 2.5%, which many see as the upper end of the neutral range. New ECB projections showed faster inflation in 2027 and 2028, with the latter slightly above target.