European Central Bank President Christine Lagarde indicated that the ECB is likely to revise upward its inflation forecast for this year at the June policy meeting, citing the continuously evolving macroeconomic landscape. However, she emphasized that long-term inflation expectations remain stable and anchored at the 2% target.
During an appearance on the Italian talk show "Che Tempo Che Fa" on Sunday, Lagarde noted that the March projection of a 2.6% increase in eurozone prices this year "might be revised," as conditions have changed since then.
This statement aligns with recent signals from several policymakers. Governing Council member Alexander Demarco previously suggested in an interview that the inflation forecast, issued shortly after the outbreak of conflict involving Iran, might have been overly optimistic.
Despite the potential upward adjustment in the short-term inflation outlook, Lagarde sought to reassure markets about long-term expectations following her remarks in Nicosia, Cyprus, after attending the Eurogroup meeting last Friday. She stated that while the energy crisis is driving inflation higher and putting pressure on the economy, "long-term inflation expectations remain broadly stable and anchored." She added that the impact of the conflict on medium-term inflation and economic activity would depend on the intensity, duration, and indirect effects of the energy price shock.
Regarding market anticipation of a potential rate hike on June 11, Lagarde avoided providing clear signals in both speeches, maintaining a stance of ambiguous forward guidance.
She said on Sunday, "The current situation is highly uncertain. We must examine all available data, assess how the economy will evolve over the coming quarters, and then determine whether action is needed and what its medium-term impact would be. Our medium-term target is 2%." Last Friday, she also reiterated that the ECB would continue to follow a data-dependent, meeting-by-meeting approach to uphold its firm commitment to price stability in a highly uncertain environment.
Nevertheless, market expectations for a rate hike remain firm. Economists and investors widely anticipate that the ECB will announce a 25-basis-point rate increase on June 11. Many of Lagarde's colleagues have also hinted that such a tightening move may be unavoidable unless a lasting peace agreement is reached between the U.S. and Iran.
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