Lagarde: Inflation Expectations Remain Anchored, ECB Sees No Need for Stronger Policy Response
Alina Collins
ECB President Lagarde said Monday that spillovers from the Middle East conflict do not yet warrant a stronger policy response — inflation expectations remain anchored at the 2% target — but rising core inflation and falling oil prices are pulling the policy calculus in opposite directions.
Why does Lagarde say "no need to escalate"?
Her core argument: households do not believe the current 3%-plus price rises will last. Medium-term inflation expectations remain anchored at 2%.
This means → as long as people are not panic-buying or demanding higher wages in response, the ECB considers its current policy stance sufficient.
She added explicitly: no evidence yet of second-round wage effects — pay has not begun spiraling upward with prices.
If not escalating, what is the ECB's game plan?
Lagarde reaffirmed a meeting-by-meeting, data-dependent framework. No pre-commitment to any rate path.
In plain terms = the ECB will look at the latest numbers each session and decide then — no roadmap drawn in advance.
She did acknowledge the shock is "too large to look through without endangering the target." The ECB must stay flexible, keeping its response proportionate to how the shock evolves.
Core inflation is rising while oil prices are falling — how to read this contradiction?
May core inflation (stripping out energy and food) accelerated from 2.2% in April to 2.6%, revised up from the flash estimate.
This means → underneath the oil-price noise, underlying price pressure is actually strengthening — hard data that keeps the ECB from turning dovish.
At the same time, oil fell below $80 a barrel Monday after U.S.–Iran negotiators agreed on a roadmap toward a final deal, easing some energy-supply fears.
This reflects two signals pulling in opposite directions: core inflation says "tighten," oil prices say "you can breathe."
How did markets react to Lagarde's remarks?
Traders trimmed year-end rate-hike bets from 37 basis points to 33 basis points, but still price in at least another 25 bp increase to 2.5% on the deposit rate.
Germany's two-year Bund yield dropped 6 bp to 2.59% immediately after the speech.
In plain terms = the market read: rate hikes are still likely, but the pace may be a beat slower than previously assumed.
Who else inside the ECB is worth watching?
ECB Governing Council member and Bank of Spain Governor José Luis Escrivá said earlier Monday that the ECB must remain "vigilant" about second-round effects from oil-price shocks feeding into wages.
His language leaned more hawkish than Lagarde's: he stressed that persistence depends on the resilience of price growth — implying escalation remains an option if core inflation does not retreat.
This means → the ECB is not monolithic. There is a temperature gap between Lagarde's "sufficient for now" stance and the wariness of some Council members.
Content is for reference only, not financial advice.