European Central Bank President Christine Lagarde has stated that high energy prices are spreading to other parts of the economy, with clear signs of indirect inflation effects emerging recently. She noted that risks of "second-round effects," particularly wage increases, are surfacing, compelling the ECB to act. Concurrently, she welcomed the provisional ceasefire agreement between the US and Iran, suggesting that if it leads to the reopening of the Strait of Hormuz, it would be "good news."
In an interview, Lagarde pointed out, "In recent weeks, we have started to see indirect effects of inflation almost everywhere. When we perceive that second-round effects—especially the risk of wage increases—are beginning to emerge, we must take action." She added that the ECB is particularly focused on underlying inflation indicators.
Just last week, the ECB implemented its first interest rate hike since 2023 to address price pressures exacerbated by conflict in the Middle East. Policymakers have not ruled out the possibility of further rate increases at the July meeting.
Officials such as Bundesbank President Joachim Nagel believe that even if the conflict involving Iran concludes swiftly, prices could remain elevated for an extended period. ECB Governing Council member Martins Kazaks also stated in a separate interview that the central bank stands ready to take further action to prevent energy price increases from spreading throughout the broader economy.
Addressing criticism, particularly from France, that rate hikes would stifle economic growth, Lagarde responded, "I hear the criticism—often from France, and I understand them—saying 'you are taking measures, this will kill growth.' But if inflation rises, I must stamp it out. Because once inflation gets out of control, putting it back in the bottle is much more difficult and costly. Persistent inflation is unacceptable for consumers and businesses; in that case, I would fail in my mandate."
However, it is noteworthy that several hours before Lagarde's remarks, the US and Iran indicated they had reached a provisional agreement to end hostilities and reopen the Strait of Hormuz. This preliminary deal caused oil prices to drop, though the ultimate fate of Iran's nuclear program remains subject to further negotiation.
Lagarde commented on this development: "If this news is confirmed in the coming days with the development and signing of a memorandum of understanding, that would be good news, we welcome it, especially if it means the Strait of Hormuz reopens and mines are cleared." She cautioned, however, that "the story is not over," and "the whole issue of uranium enrichment remains to be debated, agreed upon, and formalized in an agreement."
Using a nautical metaphor, Lagarde expressed her determination to stay the course: "When a storm comes, the captain stays on the ship. So as the 'captain' of the ECB, I am staying at my post. The situation we face today, we hope, will improve with the potential agreement that may be found for the Middle East war." She emphasized that her duty is to fulfill the price stability mandate, which currently guides her actions.
Regarding the political situation in France, she stated she would monitor related discourse and would speak out if she found France's position at the core of the EU threatened by misunderstanding, wishful thinking, or separatism. She explicitly denied being a candidate for any position.
Furthermore, Lagarde called for advancing the euro area's capital markets union (now renamed the "Savings and Investment Union"). She stated that the key to its success lies in launching common debt instruments to provide market depth and liquidity.
"This is precisely one of the keys to US success—the US dollar is strong because of the massive scale of US Treasury bonds, which gives investors liquidity. Today we do not have such an instrument. It's not that we cannot do it; we did it once during the COVID-19 pandemic." She expressed that another pandemic is not needed to act, hoping that under the framework of economic and monetary union, fiscal and economic cooperation around joint projects among member states could provide justification for collective financing.
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