ECB’s Lagarde says inflation to stay high, sees little reason to alter rate course

 Euro zone inflation will remain elevated over the coming quarters, European Central Bank President Christine Lagarde said, signaling that it would take "significant changes" to deter policymakers from raising interest rates again in December. 

In an interview published Saturday by Japanese newspaper Yomiuri Shimbun, Lagarde noted that while price pressures are set to persist, secondary inflation pass-through has so far developed within the central bank’s expectations.

"We know that inflation numbers will remain high in the quarters to come," Lagarde told the newspaper. "The higher they are, and the longer they remain high, the greater the risk to our medium-term target."

The remarks follow the ECB’s decision in late October to hold its benchmark deposit rate steady at 2.50%. However, with headline inflation across the 21-member currency bloc running at double the central bank’s 2% objective - fueled by the surge in global crude and European natural gas prices since the eruption of the Middle East conflict - Governing Council hawks have increasingly pushed for renewed tightening.

Gauging wages and financial conditions 

While core inflation held unchanged in October at 2.5%, Lagarde indicated that policymakers will scrutinize granular components before deciding whether to deliver a 25-basis-point hike next month, which would mark the third rate increase of the current cycle.

Crucially, the ECB chief noted that wage metrics have not yet triggered an alarming upward spiral.

"For the moment, we’re not seeing second-round effects beyond what we have incorporated in our projections," Lagarde said. "We’re watching carefully the forward-looking indicators - multi-year wage agreements, companies’ wage expectations - and we don’t see evidence of a shift yet."

ECB Policy Outlook & Macroeconomic Setting

Growth dilemma and succession race

A central challenge confronting policymakers is whether further tightening risks derailing economic momentum across the euro area. An additional quarter-point hike in December would push borrowing costs to the upper bound of the neutral policy range, beyond which interest rates actively restrict growth.

Furthermore, the recent worldwide surge in sovereign bond yields - spurred by heavy corporate debt issuance and heightened sovereign risk premiums, as seen in French 10-year OAT yields - is already exerting restrictive pressure on credit channels.

Despite those cross-currents, Lagarde reiterated that the bias remains toward tighter policy.

"I cannot tell you today that we will for sure do this in December," she said. "What I know is that, on the basis of the information we have today, it would take significant changes for the direction of travel to be different from what I expect."

The looming rate decision coincides with a leadership transition at the helm of European monetary policy. Lagarde, 70, announced last month that she will step down in February 2027, nine months before the formal end of her term. The Eurogroup confirmed on Friday that Dutch central bank chief Klaas Knot and former Bank of Spain Governor Pablo Hernández de Cos have emerged as the leading candidates to succeed her.