ECB President Lagarde: Will Raise Rates at "Any Meeting" if Necessary, Central Bank Will Not Be "Paralyzed by Hesitation" on Iran Issue

Energy prices surge, pushing inflation pressures in the Eurozone to a critical point, forcing the European Central Bank to confront policy choices.

On March 25, ECB President Christine Lagarde stated that “In response to the sharp rise in energy prices triggered by the Middle East conflict, the ECB will act decisively and swiftly, and will not become paralyzed by concerns.” This statement further reinforced market expectations of an interest rate hike by the ECB.

At the ECB’s annual observer conference, Lagarde said the central bank “will not act until sufficient information is available,” but “the commitment to achieve the 2% inflation target is unconditional.” She explicitly stated that “if necessary, we are prepared to adjust policies at any meeting.”

Inflation in the Eurozone is worsening rapidly. Last week’s ECB baseline forecast shows that this year, consumer prices are expected to rise by 2.6%, and in an extreme scenario where energy supplies remain constrained, inflation could reach 6.3%. Meanwhile, data released on Tuesday indicated that economic activity in the Eurozone has fallen to its lowest level since May last year, with rising energy prices posing a dual threat to the European economy.

Beware of the risk of energy shocks expanding; the ECB will maintain policy agility

Lagarde said that the ECB is responding to the current sudden situation and emphasized that the key is whether there is a risk of the shock expanding.

She pointed out that there is evidence that the impact of energy prices on overall inflation in the Eurozone is “significantly abnormal,” but this judgment may change depending on the shock’s strength, duration, and macroeconomic environment. She stated that “early identification of key risks of shock expansion” is crucial, and hinted that the ECB will maintain “policy agility.”

Lagarde warned that, given the current situation, attacks on energy infrastructure in the Gulf region continue unabated, “the likelihood of a quick return to normalcy is decreasing.” This means that, compared to four years ago, businesses and workers may need to respond to energy shocks at a noticeably faster pace.

Lessons from 2022 “still fresh,” watch out for accelerated inflation transmission

The current situation bears similarities to the Eurozone’s inflation surge into double digits after the 2022 energy crisis, but there are also clear differences. Lagarde admitted that there are “reasons to remain cautious.”

The ECB was widely criticized for its slow response during the last inflation cycle. Bundesbank President Joachim Nagel said in a Bloomberg interview last week that that experience “will play an important role.” Although the ECB’s starting point is now more severe—since inflation levels are significantly below target and policy stance has returned to neutral—historical experience still offers valuable lessons.

Lagarde pointed out, “Our memory of high inflation is still fresh, which may influence the speed of price transmission and the pace of wage-setting responses.” This suggests that the second round of inflation effects could appear earlier than in the previous cycle.

Internal tightening discussions heat up; April meeting may become a policy adjustment window

Within the ECB, discussions on policy tightening are gradually emerging. Officials like Nagel have signaled that if inflation prospects worsen further, policy adjustments could be made as early as the April meeting.

Weeks ago, market concerns about Eurozone inflation remaining below the 2% target were dominant. Now, the situation has sharply reversed, and the likelihood of inflation significantly exceeding the target in the coming months has increased substantially. Lagarde’s statement on Wednesday that she is “ready to adjust policies at any meeting” is seen by markets as a clear signal that the ECB is open to a rate hike in April.

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