President of the European Central Bank (ECB) Christine Lagarde addresses the media after the meeting of the Governing Council of the ECB at the ECB headquarters in Frankfurt, Germany on September 11, 2025.
Kai Pfaffenback | reuters
The head of the European Central Bank said on Wednesday that policymakers are prepared to raise interest rates even if an expected surge in euro zone inflation proves temporary.
ECB President Christine Lagarde said there could be a “not very persistent” rise in inflation after the bank was forced to upgrade expectations for euro zone inflation, which is now forecast to rise above the 2% target.
“If the shock gives rise to a large, though not very-sustained, overshoot from our (inflation target), some measured adjustment of policy may be needed,” Lagarde told an audience at “The ECB and Its Watchers” conference in Frankfurt, Germany.
“Leaving such overreach completely undetected could create a communication risk: the public may find it difficult to understand a response function that does not respond,” he said, without giving any timeline or criteria for when the central bank might deem an interest rate hike necessary.
Before the Iran conflict erupted in late February, the euro zone inflation rate had fallen below the central bank’s 2% target. In February, however, the rate Ticked up to 1.9%.
The war and Tehran’s retaliation by almost completely blocking the Strait of Hormuz have sent global oil and gas prices soaring and upset inflation forecasts in Europe.
The ECB said last week – when it kept its key deposit rate at 2% – that it now expects headline inflation to average 2.6% in 2026, 2% in 2027 and 2.1% in 2028. basic scenario.
In its more “adverse” scenario, the central bank warned that inflation could peak at 4% this year. “serious” base case (Assuming stronger and more frequent energy price shocks and more significant destruction of Gulf energy infrastructure), the rate could reach above 6% as early as next year.
“If we expect inflation to deviate significantly and persistently from target, the response must be appropriately strong or persistent,” Lagarde said on Wednesday.
Separately on Wednesday, ECB Chief Economist Philip Lane said companies’ price-growth expectations and wages for new hires were some of the key inflation indicators the ECB would monitor.
There are already signs that the war in Iran is hurting trade confidence and activity, with private sector output in the euro zone’s manufacturing and services sectors falling to a 10-month low in March, according to S&P Global Flash Purchasing Managers’ Index data released on Tuesday.
