ECB President Lagarde: Will remain in office at least until the end of the year; energy shocks will drive inflation higher until the first half of 2027.

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European Central Bank President Christine Lagarde made it clear on Thursday that she will not step down before 2027, while warning that the energy shock will keep eurozone inflation above target until the first half of 2027, with economic growth prospects facing downside risks.

On monetary policy, the European Central Bank kept interest rates unchanged. The decision was passed unanimously. Lagarde stated that "there is no impetus for a rate hike today" and emphasized that more data would be available for reference in September.

Meanwhile, she said the meeting had removed the "more balanced" wording from the Sintra assessment, with risk assessment back to its status in June, driven mainly by the resurgence of geopolitical tensions.

On the much-watched issue of her term, Lagarde made it clear: "Before 2027, you won’t stop seeing me", but she also left open the option of stepping down before her term ends, saying, "I don’t like being boxed in under any particular circumstance." This remark helps ease recent market speculation about her early departure.

Energy shock pushes inflation higher, ECB pauses and waits

Lagarde pointed out that the rise in energy prices "is likely to keep the inflation rate well above target until the first half of 2027." After that, as energy prices are expected to fall and other price increases slow, inflation should gradually come down.

Regarding the current economic situation, Lagarde said: services activity is recovering, manufacturing remains resilient, and increasing defense spending is supporting industry. However, overall growth will stay moderate in the short term. She also emphasized that the drivers of medium-term economic growth remain intact.

On inflation transmission, Lagarde stated that both the direct impact of the energy shock and indirect impacts such as higher transportation costs have already emerged, but the ECB has so far observed no second-round effects. Wage trackers show moderate growth, wages are rising more slowly, and medium-term inflation expectations remain well-anchored.

Nevertheless, Lagarde made it clear that she is concerned about the risk of second-round effects and said ECB staff are preparing a special analysis report on oil and gas for the September meeting.

Geopolitical uncertainty rises, risk assessment returns to June baseline

Lagarde confirmed that the ECB’s risk assessment has returned to its June status. She noted that while the US and Iran reached a memorandum of understanding in June, "there have been new setbacks in recent weeks and the geopolitical situation remains fragile", further stating, "Now we see a renewed escalation of conflict," and, "The Middle East situation could rapidly reverse."

In terms of scenario outlook, Lagarde said that the previously relatively optimistic, mild scenario is "now looking quite unlikely."

She described the conflict as the main source of uncertainty for inflation and growth prospects and said the ECB is closely monitoring the scale and duration of energy price increases, as well as their impact on price and wage setting, inflation expectations, and the broader economic dynamic.

Lagarde revealed that some Governing Council members asked themselves during the meeting whether it was necessary to raise interest rates, but the final decision was unanimous to keep policy unchanged. She stated that the current stance is "sufficient to support continued wait-and-see," and reiterated that the ECB will not provide any forward guidance.

This meeting did not discuss the minimum reserve requirement. Lagarde said it may be discussed in the future. She also stated that fiscal measures to address the energy shock should be targeted and temporary, and called for urgent action to strengthen the eurozone economy.

Succession speculation heats up, Lagarde moves to stabilize expectations

Regarding her term, Lagarde's comments were more explicit than before. Previously, she had said in a newspaper interview that it was "possible" she would step down early to participate in French politics, while emphasizing she was "not a candidate for any position". About one-third of economists predict Lagarde will not complete her eight-year term.

As early as June, she had confirmed she considered resigning before the outbreak of war in Iran, and speculation about her taking a position at the World Economic Forum has continued. According to the Financial Times, her remarks sparked some discontent within the ECB.

Regarding possible successors, Bloomberg surveys indicate that the current head of the Bank for International Settlements and former governor of Spain’s central bank, Pablo Hernandez de Cos, is seen as the front-runner. According to Spain's Expansión newspaper this week, the Madrid government plans to support Hernandez de Cos for the ECB presidency.

The survey also shows another strong candidate is Klaas Knot, who stepped down last year as the governor of the Dutch central bank.

Additionally, Bundesbank President Joachim Nagel and Executive Board member Isabel Schnabel have also expressed interest, but the German government has not yet announced a position. German Chancellor Friedrich Merz stated last week that, since Lagarde’s term has more than a year left, there is "no need" to launch a succession process soon.

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