The European Central Bank raised interest rates this week for the second time since the outbreak of the war, which drove oil and gas prices higher, while its President Christine Lagarde said the euro zone will face a longer period of high inflation and that the current price shock appears more persistent than previously expected.
People familiar with the matter said bank officials expect further increases to bring inflation, currently above 3%, back to the 2% target. The deposit rate stood at 2.5% after the latest increase, a level many monetary policymakers consider the upper end of the neutral range.
Energy pressures prolong the shock
In an interview, Lagarde said the war with Iran and the continuing conflict in the Middle East are keeping pressure on energy markets, predicting continued volatility and higher energy prices despite the potential drag on economic growth.
She said the European economy had suffered a “major shock” that could last longer than previously estimated, noting that the war with Iran and declining refining capacity worldwide, particularly in Russia, had increased energy costs and had broadly affected the prices of goods and services.
Lagarde added that the resilience of the euro-zone economy requires the central bank to act to counter inflationary pressures and maintain price stability. Joachim Nagel, president of Germany’s central bank, said the European Central Bank may have to push borrowing costs to moderately restrictive levels to control inflation.
The European Central Bank’s new forecasts showed higher projected inflation rates for 2027 and 2028, with the forecast for the latter year slightly exceeding the target. The bank also raised its economic growth estimates, supported by the euro zone’s resilience in the face of the effects of the war in the Middle East and other pressures, including U.S. trade policies.
Warning over artificial-intelligence asset valuations
Lagarde warned that valuations of artificial-intelligence-related assets had become excessively high, saying the planned wave of initial public offerings reflected that overvaluation.
She spoke of what she described as “interconnectedness risks,” in which one company invests in another before awarding it commercial contracts, such as for the supply of electronic chips, noting that this type of risk is still being assessed.
Lagarde said a correction in the sector’s valuations could occur in the future, but stressed that European banks hold artificial-intelligence-related assets within a financial sector that is stronger and more resilient than in the past.
France’s reforms and debt
On France, Lagarde stressed the importance of implementing the structural reforms planned by the country and reiterated her opposition to proposals from the far left to cancel debt held by central banks, describing the idea as “extremely dangerous from a financial standpoint.”
Lagarde ruled out running in the French presidential election or returning to politics after leaving the European Central Bank, saying she will leave her post next year without commenting on whether she will complete her term through October 2027.
