ECB President Christine Lagarde pushed back against rising market expectations for near-term rate hikes, signaling caution despite the energy shock from the Middle East conflict. Investors have increasingly priced the risk of tightening as the closure of the Strait of Hormuz drives fuel costs higher in the energy-importing Eurozone, but Lagarde made clear it is too early to draw firm policy conclusions.
Speaking to Bloomberg TV, Lagarde emphasized the high level of uncertainty and rejected attempts to lock in a policy path. “It doesn’t predicate that we’ll go in one direction or the other,” she said, adding that the current situation “certainly does not determine a rate path” at this stage. She also cautioned against overconfidence, noting that colleagues predicting a specific outcome “don’t know, honestly.”
The ECB’s latest projections underscore the dilemma. While the baseline assumes the impact of the Iran war will be short-lived, alternative scenarios point to more persistent risks. In the adverse case, higher energy prices and broader spillovers could push inflation significantly higher, with the most extreme scenario seeing inflation reach 4.8% next year. Lagarde said the economy is currently “between the baseline and the adverse”.
