European Central Bank President Christine Lagarde has stated that high energy prices are spreading to other sectors of the economy, with clear signs of indirect inflation effects emerging recently. She highlighted the increasing risk of "second-round effects," particularly wage increases, which will compel the ECB to act.
In an interview, she also welcomed the provisional ceasefire agreement between the US and Iran, noting that if it leads to the reopening of the Strait of Hormuz, it would be "good news."
Lagarde pointed out in the interview, "In recent weeks, we have begun to see the indirect effects of inflation almost everywhere. When we see signs of second-round effects—especially wage risks—starting to appear, 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 counter price pressures intensified by the Middle East conflict. Policymakers have not ruled out the possibility of another rate increase at the July meeting.
Policymakers like Bundesbank President Joachim Nagel believe that prices could remain elevated for a longer period even if the conflict with Iran ends soon. ECB Governing Council member Martins Kazaks also stated in a separate interview that the central bank stands ready to act further 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 it—saying 'you are taking measures, this will kill growth.' But if inflation picks up, I must push it back down. 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, and I would fail in my mandate."
However, it is noteworthy that just 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 fall, though the ultimate fate of Iran's nuclear program remains subject to further negotiations.
Lagarde commented on this development, "If this news is confirmed in the coming days with the development and signing of a memorandum of understanding, it would be good news, we welcome it, especially if it means the Strait of Hormuz reopens and demining occurs." 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 analogy, 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 at my post. The situation we face today, we hope, will improve with a 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 heart 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 a key to its success lies in introducing common debt instruments to provide market depth and liquidity.
"This is precisely one of the keys to America's success—the US dollar is strong because there is a massive US Treasury market, giving investors liquidity. Today we don't have such an instrument. It's not that we can't do it; we did it once during the COVID-19 pandemic." She noted there is no need for another pandemic to justify such action, expressing hope that within the framework of the Economic and Monetary Union, member states would develop fiscal and economic cooperation around joint projects, thereby providing justification for collective financing.
Comments