The head of the European Central Bank, Christine Lagarde, has defended the bank’s recent rate hike as a necessary measure to combat inflationary pressures. In a speech at the bank’s annual monetary policy conference in Sintra, Portugal, Lagarde stated that the quarter percentage-point increase was not merely an ‘insurance hike,’ but a justified response to rising headline and core inflation. She emphasized that without this increase, inflation could have lingered above the bank’s 2% target into 2028.
The ECB raised its benchmark rate to 2.25% earlier in June, the first rate move in a year. Despite this increase, inflation is projected to return to 2% only in the last three months of 2027, with euro area annual inflation currently standing at 3.2% in May. Lagarde noted that the bank would not need to implement the large rate increases used to combat double-digit inflation following Russia’s gas supply cutoff.
Instead, the bank would adopt a more measured approach, making adjustments to rates as needed to respond to fluctuating price pressures. The ECB has rate-setting meetings scheduled for July 22-23 and September 9-10. Lagarde highlighted the bank’s improved forecasting capabilities, which enable it to respond more effectively to geopolitical events.
By using scenarios of milder and harsher outcomes, the bank can ensure that it does not over- or underreact to these events. This approach will be crucial in navigating the current economic landscape, marked by oil price fluctuations and the impact of US tariffs on European imports.
