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ECB President Christine Lagarde told the IMF’s International Monetary and Financial Committee on Oct. 17 that the euro area has remained resilient but faces downside growth risks and upside inflation risks from the Middle East conflict and energy prices. She cited September’s 25-basis-point rate increase and said future decisions would depend on incoming data and the ECB’s reaction function.
European Central Bank President Christine Lagarde told the International Monetary and Financial Committee on Oct. 17 that the euro area economy has so far proved resilient despite an energy shock, but that risks to growth and inflation remain elevated. Her statement laid out the ECB’s outlook after the Governing Council raised key interest rates by 25 basis points in September, following a similar increase in June.
Lagarde said the global economy had held up amid high uncertainty, with technology investment, including artificial intelligence, supporting activity and trade in economies connected to technology supply chains. But she pointed to the Middle East conflict’s impact on energy markets and said trade tensions and protectionist measures were weighing on confidence and changing trade flows. She assessed global growth risks as tilted to the downside and inflation risks to the upside.
For the euro area, the ECB’s September staff projections forecast growth of 0.9% in 2026, 1.4% in 2027 and 1.5% in 2028. Lagarde said growth had been broad-based across most countries and sectors in the first half of 2026. The projections envisage domestic demand gaining support from a recovery in real incomes as energy inflation eases, a resilient labour market, government spending on infrastructure and defence, and investment in digital technologies.
Euro area headline inflation rose to 3.8% in September, largely because of higher energy inflation, according to the statement. Core inflation, which excludes energy and food, increased slightly to 2.5%. Lagarde said underlying inflation measures were broadly stable and wages had not yet shown a material response to the energy shock. The ECB expects higher energy prices to keep headline inflation above its target into the first half of 2027, with inflation returning to around target toward the end of that year.
Energy Shock Tests ECB Policy
The statement sets out the trade-off facing the ECB: energy costs are pushing inflation higher even as tighter financing conditions may slow activity. Lagarde said the energy shock was too large for policymakers to ignore, while describing a measured response as appropriate. The account matters to households, businesses and governments because interest-rate decisions affect borrowing costs, demand and inflation across the euro area.
Lagarde did not signal a predetermined path for rates. She said the Governing Council would assess the inflation outlook and its risks, the direction of underlying inflation, and how strongly monetary policy is being transmitted. That framework leaves future decisions dependent on how energy prices and the wider economy develop.
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Rate Decisions Follow Two Increases
The ECB raised its key interest rates by 25 basis points in June and by the same amount in September, Lagarde said. She noted that long-term interest rates had risen notably since the ECB’s previous meeting, tightening financing conditions. In the ECB’s assessment, that tightening is likely to slow growth and reduce the extent to which higher energy costs feed through to other prices, compared with the assumptions in its September projections.
The statement also described the Eurosystem’s enhanced EUREP repo facility, which provides central banks outside the euro area with access to euro liquidity through repurchase agreements. The ECB Governing Council decided in July on the facility’s operational features and onboarding process. Lagarde said more than 30 central banks had expressed interest in the previous six months, and described EUREP as supporting monetary-policy transmission and the international role of the euro.
“The energy shock is too large to “look through” but a measured response remains appropriate to keep inflation in check.”
— Christine Lagarde, ECB president
Energy Pass-Through Remains Uncertain
The duration and intensity of the Middle East conflict, and the extent to which its effects spread through the economy, remain uncertain. Lagarde said a more intense or persistent energy shock could create stronger indirect and second-round effects, making inflation higher and more persistent. Extreme weather could also raise food prices. Conversely, she said a sustainable resolution of geopolitical conflicts, weaker energy-cost pass-through or more risk-averse financial markets could lower inflation.
The ECB said it had not yet seen significant energy-price pass-through to other prices and wages beyond what was already included in its projections. It remains unclear whether that pattern will hold if the shock continues. The statement gives the institution’s assessment and projections, not certainty about the timing or scale of future price changes. It also does not specify the size or timing of any further interest-rate moves.
ECB to Review Incoming Data
The Governing Council will make future monetary-policy decisions after a comprehensive assessment of incoming economic and financial data under its stated reaction function. Relevant developments include energy prices, underlying inflation, wage growth, financing conditions and evidence of price increases spreading beyond energy. Lagarde did not announce a date or outcome for the next rate decision in the statement.
The ECB’s September projections provide its current baseline for growth and inflation, but the statement said the outlook is exposed to geopolitical and energy-related uncertainty. Further assessments by the Governing Council will show whether the energy shock is easing as projected or requires a different policy response.
Key Questions
What did Christine Lagarde tell the IMF committee?
She said the euro area economy had shown resilience, while warning that energy-market disruption and geopolitical risks could weaken growth and raise inflation.
What is the ECB’s growth forecast for the euro area?
The September 2026 ECB staff projections forecast growth of 0.9% in 2026, 1.4% in 2027 and 1.5% in 2028.
Why did inflation rise in September?
Lagarde said headline inflation reached 3.8%, mostly reflecting a surge in energy inflation and, to a lesser extent, increases in food and services inflation. Core inflation rose slightly to 2.5%.
Did Lagarde announce another ECB rate increase?
No. She described the September 25-basis-point increase and said future decisions would depend on incoming data and the ECB’s assessment of inflation, underlying price pressures and policy transmission.
When does the ECB expect inflation to return to around target?
The ECB’s outlook, as summarized by Lagarde, expects headline inflation to decline after the first quarter of 2027 and return to around target toward the end of 2027. The projection is subject to uncertainty, particularly around energy prices and geopolitical developments.
Source: primary
