Lagarde Warns of Prolonged Inflation Shock as ECB Eyes Further Rate Hikes

European Central Bank (ECB) President Christine Lagarde said that the current inflation shock will last longer than expected due to ongoing conflicts in the Middle East and the destruction of refining capacity around the world. She noted that energy costs are driving up prices, and the ECB must react to this situation.

The ECB has already raised interest rates twice since the Iran war sent oil and gas prices soaring, and officials expect further increases to bring inflation back down to 2%. The current inflation rate is above 3%.

Lagarde also commented on the AI sector, saying that asset valuations are very high and a correction is possible. She noted that European banks hold AI-related assets but emphasized that the financial sector is stronger than it used to be.

The ECB's new projections show faster inflation in 2027 and 2028, with the latter slightly above target. Growth forecasts were also lifted due to the resilience of the euro-area economy to the Middle East conflict and other headwinds.