European Central Bank President Christine Lagarde said on Thursday that although the Middle East conflict has driven energy prices sharply higher and pushed eurozone inflation further up, there is still no clear sign that rising energy costs are feeding through to wages and prices of other goods and services.
She stressed that the ECB will closely monitor underlying inflation and wage growth, and will decide monetary policy on a data-dependent, meeting-by-meeting basis.
Although the ECB decided to keep interest rates unchanged that day, Lagarde did not rule out further rate hikes, and markets now put the probability of a 25 basis point increase in December at 88%.
"We are watching this very closely, but we do not see risks of second-round effects beyond our existing projections," Lagarde said. "At this stage we do not see a clear risk of second-round effects."
Her remarks suggest that while the energy price shock is pushing headline inflation higher, the ECB still believes the pressure has not yet turned into broad and persistent inflation.
Underlying inflation in focus, wage growth not yet clearly accelerating
Lagarde emphasized in her remarks that underlying inflation will take on greater importance in the ECB's future monetary policy assessments. She noted that the ECB needs to look not only at the direct impact of higher energy prices on headline inflation, but also at whether those cost pressures are feeding into the broader economy.
ECB data showed that eurozone headline consumer price inflation rose 3.8% year on year in September, up from 3.2% in August. Energy prices rose 18.9% year on year, widening from 14.3% in August, making energy the main driver of higher headline inflation. At the same time, inflation excluding energy rose to 2.3% from 2.1%, while services price growth rose to 3.2% from 3.0%, indicating that price pressure in some non-energy areas has also increased.
However, Lagarde pointed out that underlying inflation indicators have so far remained broadly stable and wage growth has not yet clearly reacted to the energy price shock. Data showed eurozone per capita employee compensation rose 3.3% year on year in the second quarter, down from 3.6% in the first quarter. The ECB's forward-looking wage tracker suggests negotiated wage growth will run between 2.5% and 2.8% in the remaining months of 2026, with average growth of 2.6% expected in the first three quarters of 2027. In addition, although short-term inflation expectations have risen, most longer-term inflation expectations remain around 2%. These data provide the basis for Lagarde's downplaying of second-round inflation risks.
Nevertheless, she also warned that both the scale and duration of the energy shock have increased, and that it could still push inflation higher through indirect effects and second-round effects in the future. The ECB expects headline inflation in the eurozone to remain clearly above its 2% target for several quarters, because energy price increases have already exceeded the baseline scenario in its September economic projections.
Growth faces downside risks, high financing costs weigh on demand
Beyond inflation, Lagarde also focused on the eurozone's growth outlook. She said the latest economic data show the eurozone economy continued to expand in the third quarter, but the overall growth outlook is skewed to the downside.
"The renewed rise in energy prices has already hit consumer confidence, and higher financing costs could also weigh on economic growth," she said. She noted that the eurozone services sector has recovered somewhat after weakening in the early stage of the Middle East conflict, while manufacturing, digital services and exports are benefiting from artificial intelligence-related business investment. At the same time, government spending on infrastructure and defense is also supporting economic activity.
However, higher energy prices are eroding households' real purchasing power, while persistently rising financing costs could dampen consumption and investment. ECB data showed that the cost of market-based debt financing for eurozone firms rose to 4.1% in August from 4.0% in July, while bank lending rates to companies held at 3.8%. Corporate loan demand fell in the third quarter, and banks further tightened corporate lending standards.
The housing market has also been affected by high interest rates. Eurozone mortgage rates rose to 3.6% in August from 3.5% in July, and household mortgage demand fell noticeably in the third quarter. Lagarde said tighter financing conditions could continue to restrain economic activity for some time, while also putting some downward pressure on inflation. According to a media survey of economists, eurozone growth is expected to slow to 0.2% in the third quarter, with official data due on Friday.
No preset rate path, market odds of a December hike rise to 88%
Although Lagarde played down the risk of second-round inflation from higher energy prices, she did not rule out further rate hikes. Speaking about the ECB's future policy direction, Lagarde said the direction of monetary policy is clear. However, the ECB will still adhere to the principle of being data-dependent and deciding at each meeting, and will not commit in advance to a specific rate path.
She stressed that future rate decisions will depend on the inflation outlook, changes in underlying inflation and the transmission of monetary policy. The ECB has already raised rates twice since the Iran war shocked global energy markets. This pause reflects policymakers' desire to further observe the impact of higher energy prices and previous tightening measures on the economy.
Still, financial markets widely expect the ECB to raise rates again in December. Interest rate market pricing shows investors' expectations for a December hike rose to 22 basis points, equivalent to about an 88% probability of a 25 basis point increase, up from 80% before Thursday's rate decision. The euro was little changed around 1.1153 against the dollar.
David Powell and Simona Delle Chiaie of Bloomberg Economics believe that despite the recent sharp rise in commodity prices, the overall tone of the ECB's policy statement was clearly dovish. They noted that the ECB Governing Council may be paving the way to end this tightening cycle, but is still keeping the door open for another rate hike in December.
Early departure news draws attention
It is worth noting that news on Thursday that Lagarde would step down early at one point overshadowed the ECB rate decision itself. According to reports, Lagarde plans to leave the ECB presidency early on February 7, 2027, drawing attention to the future leadership of monetary policy. Former central bank governors of Spain and the Netherlands are currently seen as potential successors.
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