Lagarde signals measured ECB response as inflation shock persists

Addressing a European Parliament committee, Lagarde positioned the ECB’s current policy stance in the middle of her previously outlined scenarios. While the central bank raised interest rates on June 11 following an inflation spike above 3%, the institution is not yet signaling a shift toward more aggressive, forceful measures. The bank’s current priority is to ensure that price pressures do not drift permanently away from its 2% target without unnecessarily stifling economic activity.

Market participants currently anticipate one to two additional rate hikes, with the next adjustment fully priced in before year-end. These expectations align with the view that the ECB’s key rate will likely remain within a neutral range of 1.75% to 2.50%, a level designed to avoid either restricting or stimulating growth. Lagarde emphasized that the bank would remain agile, noting that the present economic environment—characterized by a robust labor market and higher incomes—differs fundamentally from the record-pace tightening cycle of 2021 and 2022. Despite these buffers, she cautioned that the ECB cannot afford complacency, as wage formation remains sensitive following recent bouts of high inflation. While energy costs continue to weigh on the bloc, investment in artificial intelligence and strong household balance sheets provide a necessary cushion against an uncertain outlook.