Christine Lagarde, President of the European Central Bank, said that higher energy prices are increasing inflation risks in the eurozone, even though there is still no sign that the effects are spreading to the broader economy. Speaking at a meeting of the European Parliament's Committee on Economic and Monetary Affairs in Brussels yesterday, Lagarde said the ECB raised all three of its interest rates by 0.25% earlier this month, and that the ECB is not pursuing policy to respond directly to energy prices but is focusing on the risk that higher energy costs will feed into inflation. Headline inflation in the eurozone rose to 3.2% in August from 2.9% in July, while energy inflation rose to 14.3% from 10.3%. According to ECB staff projections for September, headline inflation is expected to average 3.0% in 2026, 2.5% in 2027 and 2.1% in 2028, while the eurozone economy is expected to expand by 0.9%, 1.4% and 1.5% respectively. Lagarde said the inflation outlook for 2027 and 2028 is higher than the ECB projected a few months ago, mainly because of higher energy prices. However, there is currently no evidence that higher energy costs are pushing up wages, she added, and while the impact of energy prices is too severe to ignore, careful policymaking remains the appropriate approach to controlling inflation. She said the economic outlook still faces a high level of uncertainty, with risks that inflation will be higher than expected while economic growth risks falling short of expectations.
Lagarde flags elevated energy-driven inflation risks and the ECB's recent 25bp hike, supporting higher policy rates/yields.
ECB rate hikes and hawkish inflation-risk stance support the euro versus the dollar.
