European Central Bank President Christine Lagarde pushed back on growing market expectations for a near-term rate hike, signaling caution despite the energy shock caused by conflict in the Middle East. Investors are increasingly assessing the risks of tightening monetary policy as the closure of the Strait of Hormuz causes fuel costs in the energy-importing euro zone to rise, but Lagarde made clear that it is too early to draw firm policy conclusions.
Speaking to Bloomberg TV, Lagarde emphasized the high level of uncertainty and rejected attempts to stabilize the policy course. “This does not indicate that we will go one way or another,” she said, adding that the current situation “certainly does not determine the price path” at this point. She also warned against overconfidence, noting that colleagues who expect a specific outcome “I don’t know, frankly.”
The latest European Central Bank forecasts highlight this dilemma. While the baseline assumes that the impact of the Iran war will be short-lived, alternative scenarios indicate more persistent risks. In the opposite case, rising energy prices and the broader implications could push inflation significantly higher, with the most extreme scenario seeing inflation reaching 4.8% next year. Lagarde said that the economy is currently “between the baseline and negative.”
