By Marta Vilar – MADRID (Econostream) – European Central Bank President Christine Lagarde said on Monday that current conditions were probably somewhere between the ECB’s baseline and milder scenarios, reflecting a decline in uncertainty since the June projections.
During the Q&A session at a hearing of the European Parliament’s Committee on Economic and Monetary Affairs, Lagarde said projected euro area GDP growth of 0.8% in 2026 was “not trivial” and rejected the characterization of the outlook as stagnation.
Asked about the neutral rate, Lagarde referred to ECB analysis placing r* between 1.75% and 2.25%, which she described as the institution’s reference range until recently. However, she observed that it was argued that the upper end of the range could now be closer to 2.5% than to 2.25%.
At the same time, she reiterated that the ECB does not use neutral rate estimates as a direct guide for monetary policy decisions.
Lagarde said the ECB had observed “some de-anchoring” of inflation expectations, particularly among consumers at shorter horizons. She pointed to an increase in one-year inflation expectations between February and April, a more limited rise in three-year expectations and virtually no change in five-year expectations.
Such movements at shorter horizons were not unusual when prices rise, she said.
“What matters to us is the longer-term expectations, and that one has been broadly unchanged, either by market measures or by survey measures or by consumer measures,” she said.
Lagarde noted that euro-area HICP inflation had risen from 1.9% in February to 3.2% in May, while core inflation had accelerated from 3.0% to 3.5%.
“[W]e have to be very attentive and we think that we have to take measures,” she said. “Particularly if in the meantime, we see that growth, which we have revised a little bit bu 0.1%, is holding.”
She added that the financial sector remained in a solid position and argued that the current environment differed from previous crisis episodes such as 2008, 2011 and 2022.
Lagarde reiterated that the ECB’s 25bp rate hike at its last meeting had been a “robust” decision across all scenarios considered by staff, including both the milder and more adverse scenarios.
“At the moment, given the reduced uncertainty, we are probably in between base and milder,” she said.
She also said monetary policy was currently not in restrictive territory.
Lagarde said the announcement of the US-Iran agreement had a “significant impact” on oil and gas prices, contributing to their recent decline.
“Having said that, we are still significantly above pre-war levels by a range of about 30% certainly on oil,” she said, noting that food prices had declined in the last couple of months, despite what might have been expected in the first place.
The impact on food prices was “likely to take a bit longer,” she said.
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