ECB President Christine Lagarde said in Brussels on Monday that the central bank remains on the “middle path” after raising interest rates by 25bp earlier this month, arguing that the energy shock is too large to ignore but has not yet become embedded deeply enough to justify a more forceful response. “We do not react to energy prices, we react if we see risks of higher energy prices becoming embedded in inflation,” Lagarde told the European Parliament’s Committee on Economic and Monetary Affairs. She said the ECB currently sees “higher inflation ahead but no signs yet that it is becoming embedded,” adding that a “measured response” remains appropriate.
The latest inflation mix supports that distinction. Headline inflation rose from 2.9% to 3.2% in August, driven largely by energy inflation accelerating from 10.3% to 14.3%. By contrast, inflation excluding energy and food edged down to 2.4%, while compensation per employee slowed from 3.6% to 3.3% in Q2. Lagarde stressed that wages have so far shown no material response to the energy shock, leaving the ECB focused less on the initial price surge than on whether it begins spreading through wages and broader underlying inflation. The September projections still see headline inflation averaging 3.0% in 2026, 2.5% in 2027 and 2.1% in 2028, while risks remain tilted upward for inflation and downward for growth.
The other reason for restraint is that market yields are already doing part of the tightening. Lagarde noted that long-term interest rates have “risen notably” since the last ECB meeting and said this should slow growth and reduce inflation pass-through by more than assumed in the September projections. The message is therefore cautiously hawkish rather than aggressively so: the ECB is unwilling to look through the energy shock, but it is equally unwilling to mechanically chase every increase in energy prices with another rate hike. Unless energy pressure starts feeding more clearly into wages and core prices, higher market yields give the ECB room to keep its response measured.
Key Takeaways
- Lagarde says the ECB remains on a “middle path”: the energy shock is too large to ignore, but policy should stay measured unless higher energy prices become embedded in wages and broader inflation.
- Headline inflation rose from 2.9% to 3.2%, largely because energy inflation accelerated from 10.3% to 14.3%. Meanwhile, inflation excluding energy and food eased to 2.4%.
- Wage data are not yet showing significant second-round effects. Compensation per employee slowed from 3.6% to 3.3%, supporting Lagarde’s view that the energy shock has not become embedded.
- Higher long-term interest rates are already tightening financial conditions. Lagarde said they should slow growth and reduce inflation pass-through by more than assumed in the September forecasts.
- The stance is cautiously hawkish rather than aggressively so: the ECB has responded to the inflation shock, but further tightening depends on evidence that energy pressure is spreading into underlying prices and wages.
