European Central Bank President Lagarde: The central bank will not be "paralyzed by hesitation" on the Iran issue and will raise interest rates at "any meeting" if necessary.

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The surge in energy prices is pushing inflationary pressure in the eurozone to a critical point, forcing the European Central Bank to confront policy choices.

On March 25, ECB President Christine Lagarde stated, in response to the sharp rise in energy prices triggered by Middle East conflicts, the central bank will act decisively and swiftly, and will not be paralyzed by concerns. This statement further reinforced market expectations of an ECB rate hike.

At the ECB Watchers Annual Conference, Lagarde said the central bank “will not act until it has sufficient information,” yet “the commitment to achieving the 2% inflation target is unconditional”. She made it clear, “if necessary, we are ready to adjust policy at any meeting”.

The inflation situation in the eurozone is deteriorating rapidly. Last week, the ECB’s baseline projection showed that consumer prices are expected to rise by 2.6% this year, and under an extreme scenario of continued disruptions to energy supply, inflation could reach as high as 6.3%. Meanwhile, data released on Tuesday showed that eurozone economic activity has fallen to its lowest level since May last year, with rising energy prices posing a double threat to the European economy.

Beware of Risk of Energy Shock Expansion, ECB to Maintain Policy Agility

In her speech, Lagarde stated that the ECB is responding to the current sudden situation and emphasized that the key lies in whether there is risk of the shock expanding.

She pointed out that there is evidence indicating that the transmission impact of energy prices on overall inflation in the eurozone is “significantly abnormal,” but this assessment may change depending on the strength and duration of the shock and the macroeconomic environment. She said, “identifying the key risk points for shock expansion early” is crucial, and hinted that the ECB will maintain “policy agility”.

Lagarde warned that in the current situation, with continuous attacks on energy infrastructure in the Gulf region, “the possibility of a rapid return to normal is decreasing”. This means that compared to four years ago, companies and workers may respond more swiftly to energy shocks.

The Lesson from 2022 is "Fresh in Memory", Beware of Accelerated Inflation Transmission Risk

The current situation has similarities and obvious differences with the eurozone inflation surge to double digits after the 2022 energy crisis. Lagarde admitted that, for now, “there is reason to remain vigilant.”

The ECB was widely criticized in the last inflation cycle for its slow response. Bundesbank President Joachim Nagel said in an interview with Bloomberg last week that that experience “will play an important role.” Although the ECB’s starting point is now more severe—with inflation significantly below target and policy stance back to neutral—historical experience still offers reference value.

Lagarde pointed out: “Our memory of high inflation is very fresh, and this may affect the speed of price transmission and the pace of wage compensation demands.” This statement suggests that second-round inflation effects may emerge earlier than in the previous cycle.

Internal Discussion on Tightening Heats Up, April Meeting May Become Policy Adjustment Window

Within the ECB, discussions about policy tightening are gradually surfacing. Officials like Nagel have signaled that if the inflation outlook deteriorates further, policy stance may be adjusted as early as the April meeting.

Several weeks ago, concerns that eurozone inflation would remain below the 2% target dominated the market. Now, the situation has reversed dramatically, and the likelihood that inflation will significantly exceed the target in the coming months has risen sharply. Lagarde's statement on Wednesday that she is “ready to adjust policy at any meeting” has been interpreted by the market as a clear signal that the ECB is open to rate hikes in April.

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