FRANKFURT, Sept 28 (Reuters) – This year’s inflation has yet to generate dangerous second round effects across the euro zone, so a moderate policy response from the European Central Bank remains appropriate, ECB chief Christine Lagarde said in a speech on Monday.
Euro zone inflation has already shot past 3% and may approach 4% by the end of the year, double the bank’s target, fuelling market bets that up to four more rate hikes will be needed in the next year on top of two moves over the summer.
Lagarde, however, appeared to push back on some of the most aggressive market bets, arguing that surging oil and gas prices, stemming from the US-Iran conflict, are the main driver of higher prices.
“We see higher inflation ahead but no signs yet that it is becoming embedded,” she told a European Parliament committee hearing in Brussels. “We do not see evidence at this stage of energy prices feeding into higher wages.”
“This means that while the shock is too large to look through, we view a measured response as appropriate to keep inflation in check,” she added.
Lagarde however acknowledged that risks were skewed towards higher inflation readings and there was high uncertainty around the outlook.
While a “measured response” is an undefined concept, economists say that the first two rate hikes, coming three months apart, are a good guide.
This is why many economists see the ECB sitting out its October 29 meeting and hiking only in December, when new projections are released.
On the economy, Lagarde remained upbeat, arguing that manufacturing is performing solidly, the labour market remains robust and investment should also support growth.
(Reporting by Balazs KoranyiEditing by Francesco Canepa and Ros Russell)
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