Lagarde: Rising long-term bond yields will dampen economic growth and may reduce the need for the ECB to raise rates significantly.

ECB President Lagarde said on Monday that the recent significant rise in long-term bond yields will weigh on euro area economic growth and weaken the extent to which elevated energy costs pass through to overall inflation. Amid another increase in energy prices, this factor may reduce the need for the ECB to tighten monetary policy significantly further. Speaking to members of the European Parliament in Brussels, Lagarde said that although euro area economic growth has shown resilience, long-term interest rates have risen markedly since the ECB's last policy meeting. "This will slow economic growth and make the pass-through of energy costs to inflation lower than we expected at the time of our September projections." She noted that there are currently no clear "second-round effects" on inflation, so the ECB should take "measured responses" as appropriate to ensure inflation is brought under control. Lagarde's latest remarks come as ECB officials weigh whether further rate hikes are needed. The Middle East conflict has driven energy prices higher, and policymakers worry that persistently rising energy costs could gradually spread to a broader range of goods and services prices and further push up wage demands, making inflationary pressure more persistent. At the same time, global bond markets have recently suffered a selloff, with long-term yields continuing to climb. For some euro area member states with more fragile fiscal positions, rising financing costs are particularly concerning. On the other hand, higher market interest rates themselves also tighten financial conditions and curb investment and consumption, thereby playing a role somewhat similar to monetary policy tightening. Data due this week are expected to show that euro area inflation jumped to 3.7% in September from 3.2% in August, reaching a relatively high level in recent years and moving further away from the ECB's 2% inflation target. Meanwhile, euro area consumers' expectations for future price increases rose again last month, intensifying policymakers' concerns about inflation persistence. As hopes for a short-term breakthrough in the Middle East situation weakened, international oil prices rose again on Monday, reigniting investors' worries about rising inflation. Interest rate markets currently expect that, after the ECB's two rate hikes so far, its deposit rate will be raised by a cumulative nearly 100 basis points over the next year, equivalent to about four 25-basis-point increases. Lagarde's remarks show that the ECB currently faces two opposing forces. On the one hand, rising energy prices and higher inflation expectations increase pressure for further rate hikes; on the other hand, surging bond yields have already tightened financial conditions on their own and may depress economic growth CKH HOLDINGS inflation pass-through. This requires the ECB to weigh inflation risks and downward economic pressure more cautiously in future policy adjustments.