Lagarde: Inflation Shock Will Last Longer
In an interview with the newspaper Ouest-France, Lagarde clarified that the war with Iran and the ongoing conflict in the Middle East continue to pressure energy markets, predicting continued volatility and rising energy prices, despite the potential slowdown in economic growth they may cause.
Lagarde emphasized that the European economy has suffered a significant shock that may last longer than previously estimated. She pointed out that the Iranian war and declining global refining capacities, particularly in Russia, have contributed to higher energy costs, which have broadly impacted the prices of goods and services.
Regarding artificial intelligence, Lagarde warned that valuations of assets linked to the sector have become excessively high, noting that the wave of planned initial public offerings reflects this overvaluation.
She also spoke about what she described as interconnected risks, where one company invests in another before awarding it commercial contracts, such as for the supply of electronic chips. She indicated that this type of risk is still under assessment.
While she suggested the possibility of a future correction in sector valuations, she stressed that European banks hold AI-linked assets within a financial sector that is stronger and more resilient than in the past.
On the French front, Lagarde underscored the importance of implementing the structural reforms planned by France. She reiterated her rejection of proposals from the far-left to cancel debts held by central banks, describing the idea as highly dangerous from a financial perspective.
The European Central Bank (ECB) raised interest rates for the second time this week, a move driven by the war that pushed oil and gas prices higher. ECB officials expect further rate hikes to bring inflation, currently above 3%, back to the targeted level of 2%.
For his part, Joachim Nagel, president of the German central bank, stated that the ECB might need to push borrowing costs to moderately restrictive levels to control inflation. Following the latest increase, the deposit rate reached 2.5%, a level considered by many monetary policymakers as the upper bound of the neutral range.
The ECB’s new forecasts showed an increase in expected inflation rates for 2027 and 2028, slightly exceeding last year’s projections above the target. The bank also raised its economic growth estimates, supported by the resilience of the eurozone economy in the face of the Middle East war’s repercussions and other pressures, including US trade policies.
