ECB’s Lane warns inflation could stay above 2% ‘for quite some time’

ECB’s Lagarde Plays Down Second-Round Inflation Fears in Euro Zone

European Central Bank President Christine Lagarde told the European Parliament on Monday that the euro zone is navigating a “middle scenario” on inflation — one that demands measured policy adjustment but not an aggressive tightening campaign. Her remarks came less than two weeks after the ECB raised interest rates for the first time since September 2023.

A Shock Too Large to Ignore, but Not Yet Destabilizing

Speaking before the Parliament’s Committee on Economic and Monetary Affairs, Lagarde said the current inflation overshoot is too large to look through without jeopardizing the ECB’s 2% target, but that there is “no evidence yet of de-anchoring of inflation expectations or second-round effects that would warrant a more forceful policy response at this stage.”reuters

Lagarde had previously outlined three potential scenarios for the bank’s policy path. She confirmed the euro zone is in the second of those cases — a temporary but meaningful price overshoot requiring a “tailored and graduated” response. Shorter-term inflation expectations have risen well above pre-war levels, she noted, while longer-term expectations remain anchored around 2%.econostream-media

The ECB raised its deposit rate by 25 basis points to 2.25% on June 11, its first hike since 2023, after euro zone inflation surpassed 3% driven by surging energy prices linked to the Middle East conflict. Eurosystem staff projections now see headline inflation averaging 3.0% in 2026, 2.3% in 2027, and 2.0% in 2028.europa

Lane Warns Inflation Could Linger Above Target

In a separate appearance before the European Parliament on Tuesday, ECB Chief Economist Philip Lane struck a more cautious note, warning that inflation could remain above 2% “for quite some time” even as peace prospects between the United States and Iran improve.bloomberg

Lane pointed to forward-looking indicators including purchasing manager surveys and selling-price expectations as signals of persistent inflationary pressures in the months ahead. He added that the increase in energy prices is expected to keep inflation well above target into the first half of 2027.mitrade

Market Expectations and the Path Ahead

Financial markets have priced in one to two additional rate increases by year-end, with the next adjustment expected in September or October. The ECB’s neutral rate is currently estimated between 1.75% and 2.50%, suggesting limited room for further tightening before policy enters restrictive territory.reuters

The ECB’s next scheduled policy meeting is July 23, followed by September 10. Lagarde did not commit to any specific timeline for further action, reiterating the bank’s “data-dependent and meeting-by-meeting approach.”morningstar