ECB President Says Gradual Rate Hikes Remain Appropriate, No Second-Round Inflation Effects Seen

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European Central Bank President Christine Lagarde said on the 28th that this year's inflation has not yet produced dangerous second-round effects across the euro area, so gradual policy action by the ECB remains appropriate. She was speaking at a committee hearing of the European Parliament. Euro-area inflation has already exceeded 3% and could approach 4% by year-end, double the ECB's target. Markets widely expect that, on top of the two rate hikes carried out during the summer, as many as four more increases will be needed over the coming year. Lagarde, however, pushed back against some market expectations for aggressive rate hikes, noting that the surge in crude oil and gas prices stemming from the US-Iran conflict is the main driver of price increases. She added that inflation is expected to rise further but that there are no signs yet that it is becoming entrenched, and that at this stage there is no evidence that energy prices are feeding through to wage growth. She also said the current shock is too large to be dismissed as temporary, while the ECB believes a cautious approach is appropriate to contain inflation, though she acknowledged that inflation indicators are tilted toward upside risks and that uncertainty surrounding the outlook is extremely high. While the definition of a cautious approach is not clear, economists say the first two rate hikes, carried out at three-month intervals, serve as a guide. Lagarde maintained an optimistic view on the economy, saying manufacturing is holding firm, the labor market is solid, and investment should support growth.

Impact on assets 3

Others▲
％ECB rates
ECBRATES
▲ PositiveMonetaryrelevance

Lagarde signals gradual rate hikes remain appropriate, pushing back on aggressive tightening expectations, so the ECB policy rate path is lower than markets feared.

％Germany Government Bond 10Y
DE-10Y
▲ PositiveMonetaryrelevance

Dovish-leaning ECB guidance (gradual hikes, no second-round effects) lowers expected rate path, pushing German 10Y yields down (bond prices up).

Others▼