European Central Bank President: Even if the expected surge in inflation is only a short-term phenomenon, the European Central Bank is ready to raise interest rates

Key Points

European Central Bank President Christine Lagarde stated on Wednesday that as long as inflation increases are not temporary spikes, they could justify a rate hike.

The ECB maintained interest rates at their most recent monetary policy meeting last week. The bank forecast that the eurozone inflation rate will average 2.6% in 2026.

European Central Bank President Lagarde said on Wednesday that even if the inflation increase expected in the eurozone proves to be only temporary, policymakers are prepared to raise interest rates.

Lagarde stated that after the ECB was forced to raise inflation expectations for the eurozone, even a rise that is “not very persistent” could trigger a rate hike. Currently, eurozone inflation expectations are above the 2% target level.

At the “European Central Bank and Its Observers” conference in Frankfurt, Germany, Lagarde said: “If shocks cause inflation to significantly exceed our target, even if only for a short duration, it may be necessary to adjust policies accordingly.”

She added, “Ignoring such overshoot entirely could pose communication risks: the public might find it difficult to understand a policy response mechanism that does not react.” However, she did not specify the timing or criteria the central bank considers necessary to justify a rate hike.

Before the conflict in Iran erupted in late February, eurozone inflation had fallen below the ECB’s 2% target. However, inflation in February slightly rebounded to 1.9%.

The recent conflict, along with Iran’s retaliatory and nearly comprehensive blockade of the Strait of Hormuz, has caused a surge in global oil and gas prices and disrupted Europe’s inflation expectations.

Last week, the ECB announced that the key deposit rate would remain at 2%, while stating that under the baseline scenario, the overall inflation rate is expected to average 2.6% in 2026, 2% in 2027, and 2.1% in 2028.

In a “stress scenario,” the bank warned that inflation could reach as high as 4% this year; in an “extreme scenario” (assuming stronger and longer-lasting energy price shocks, and further severe damage to Gulf region energy infrastructure), inflation could peak above 6% early next year.

Lagarde said on Wednesday: “If we expect inflation to deviate significantly and persistently from our target, we must take appropriate and sustained measures.”

Another report on Wednesday indicated that ECB Chief Economist Philip Lane said that corporate price expectations and new employee wages are key inflation indicators the ECB will monitor closely.

Preliminary PMI data released by S&P Global on Tuesday showed signs that the Iran conflict is impacting business confidence and economic activity, with eurozone manufacturing and services private sector output falling to a 10-month low in March.