In a speech delivered at the “ECB and Its Watchers” conference, organised by the Institute for Monetary and Financial Stability at Goethe University Frankfurt, Christine Lagarde outlined the key challenges facing the European Central Bank amid growing uncertainty in energy markets. The ECB President stressed that the central bank remains on heightened alert and is assessing to what extent rising energy commodity prices could feed through to inflation in the euro area. She noted that the current disruptions do not necessarily have to lead automatically to a lasting increase in price pressures, but the risk of such a scenario has clearly increased, especially if supply-side problems in the energy market persist for longer.
Lagarde said that monetary policy must remain flexible and guided by incoming data. In her view, the ECB’s response should depend both on the scale and the persistence of the energy shock. Short-term price fluctuations do not require immediate intervention, but a more persistent increase in energy costs, with broader effects on the economy, could require adjustments to monetary policy settings. At the same time, she pointed to the risk of a more difficult macroeconomic scenario in which higher inflation coincides with slower economic growth. More expensive energy reduces households’ purchasing power and raises operating costs for businesses, which may weaken economic activity across the euro area.
In her remarks, Lagarde also referred to the latest inflation projections. In the European Central Bank’s baseline scenario, inflation in the euro area is expected to reach around 2.6% this year. However, in the event of stronger and more persistent disruptions in the energy market, it could rise to as much as around 6.3%, significantly exceeding the central bank’s inflation target. Christine Lagarde’s speech confirms that the European Central Bank is preparing for various possible developments, while seeking to maintain a balance between curbing inflation and minimising the negative impact of energy shocks on economic growth. EUR/USD is currently consolidating around the 1.16 level.
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