Lagarde: Eurozone economy has fallen below the ECB baseline scenario and is not inclined to raise interest rates for the time being.

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European Central Bank President Christine Lagarde stated that the eurozone economic situation has deviated from the bank’s baseline forecast trajectory and is currently insufficient to trigger a rate hike.

According to Bloomberg, Lagarde said Tuesday during the IMF Spring Meetings in Washington that the eurozone is currently "between the baseline scenario and the adverse scenario." She also clearly denied that the ECB has a policy bias toward tightening monetary policy, stating that the core guidance of the bank is "price stability based on financial stability."

The Middle East has endured about six and a half weeks of armed conflict, energy prices have risen sharply, and economic confidence has been noticeably hit. The overall inflation rate in the eurozone has significantly exceeded the 2% target level.

The latest forecasts released by the International Monetary Fund on the same day show that global inflation will accelerate, while economic growth will slow—among them, eurozone consumer prices are expected to rise by 2.6% this year, in line with the ECB’s own forecasts.

The market currently expects the ECB to raise rates at least twice this year, each time by 25 basis points. However, given the uncertain prospects for U.S.-Iran talks, traders generally believe it is unlikely for any action to be taken at the April 29–30 policy meeting.

Scenario Assessment: Rising Probability of Adverse Scenario

Several officials at the ECB’s Frankfurt headquarters now believe that, with the ongoing conflict and worsening blockade of the Strait of Hormuz, the probability of realizing the baseline scenario is declining.

The bank’s adverse scenario expects the inflation peak to reach 4.2%. If the situation further deteriorates, the severe scenario includes a brief economic recession and the possibility of inflation exceeding 6%.

Lagarde's statements indicate that the ECB's judgment of the current situation has become noticeably cautious, but no directional policy commitment has yet been made.

Energy Cost Transmission and Wage Growth as Key Variables

The core issue officials are closely monitoring is the intensity of higher energy costs spreading to other areas of the economy, especially wage dynamics.

After Russia invaded Ukraine in 2022, inflation once broke through 10%, triggering strong wage growth—this historical trajectory has made authorities highly alert.

Lagarde emphasized that the ECB's stance is "needs data to act, but won’t hesitate to act." She pointed out that the key judgment is whether this inflation shock is temporary or will create sustained pressure. She also admitted that simply returning to the past state is "in reality impossible."

Policy Timing: Data Driven, Window Undecided

Market expectations for an ECB rate hike within the year are already quite firm, but the exact pace highly depends on developments in the Middle East and subsequent economic data. The current uncertainty in U.S.-Iran talks means the probability of no action at recent meetings is high.

For investors, Lagarde's remarks deliver a clear signal: the ECB has not yet locked in a rate hike path, but once data confirms sustained inflation, policy shifts will follow quickly.

The trends in energy prices, wage data, and inflation readings to be published before the next policy meeting will be key indicators for determining ECB policy timing.

Risk Warning and DisclaimerThe market carries risks, and investment needs caution. This article does not constitute personal investment advice and does not take into account individual users’ specific investment goals, financial situation, or needs. Users should consider whether any opinion, viewpoint, or conclusion in this article suits their specific situation. Investments made based on this, are at their own risk. ```