Lagarde plays down the risk of inflation broadening from rising energy prices, stresses that wage pressures remain moderate; probability of an ECB rate hike in December rises to 88%

ECB President Lagarde said on Thursday that although the Middle East conflict has caused energy prices to continue soaring, pushing euro area inflation further higher, no signs have yet been found that rising energy costs are clearly feeding through to wages and other goods and services prices. She stressed that the ECB will closely monitor underlying inflation and wage growth and decide the direction of monetary policy meeting by meeting based on economic data. Although the ECB decided that day to keep rates unchanged, Lagarde did not rule out the possibility of further rate hikes, and the market-implied probability of a 25-basis-point hike in December has risen to 88%. At a press conference held on Thursday, Lagarde revealed that the ECB Governing Council had discussed the possibility of a rate hike but ultimately decided to keep the three key policy rates unchanged. She said the ECB is closely watching whether rising energy prices will trigger broader inflationary pressures, but no clear second-round inflation effects have yet been found. "We are monitoring the situation closely, but at this stage we do not see a risk of second-round effects beyond our existing projections," Lagarde said. "At this stage we have not identified a clear risk of second-round effects." Lagarde's remarks mean that although the energy price shock is pushing up headline inflation, the ECB currently still believes that the related pressures have not yet evolved into a broad and persistent rise in inflation. Emphasis on the importance of underlying inflation; wage growth has not yet clearly accelerated In her remarks, Lagarde stressed that underlying inflation will occupy a more important position in the ECB's future monetary policy assessments. She pointed out that the ECB needs not only to pay attention to the direct impact of rising energy prices on headline inflation, but also to judge whether related cost pressures are feeding through to broader areas of the economy. Data released by the ECB show that the euro area's headline consumer price index (CPI) rose 3.8% year on year in September, higher than 3.2% in August. Among them, energy prices rose 18.9% year on year, widening from 14.3% in August, becoming the main factor driving the rise in headline inflation. At the same time, inflation excluding energy rose to 2.3% from 2.1%, and services price growth rose to 3.2% from 3.0%, indicating that price pressures in some non-energy areas have also increased. However, Lagarde pointed out that underlying inflation indicators have so far remained broadly stable, and wage growth has not yet clearly responded to the energy price shock. Data show that compensation per employee in the euro area rose 3.3% year on year in the second quarter, lower than 3.6% in the first quarter. The ECB's forward-looking wage tracker shows that agreed wage growth in the remaining months of 2026 is expected to fluctuate between 2.5% and 2.8%, and the average growth rate in the first three quarters of 2027 is expected to be 2.6%. In addition, although short-term inflation expectations have risen somewhat, most long-term inflation expectation indicators remain around 2%. These data provide the basis for Lagarde to play down the risk of second-round inflation. However, she also warned that both the scale and duration of the energy shock have increased, and it may still push inflation further higher in the future through indirect effects and second-round effects. The ECB expects that, because energy price increases have already exceeded the baseline scenario in the September economic projections, euro area headline inflation will remain significantly above the 2% target for several quarters to come. Economic growth faces downside risks; high financing costs are restraining demand In addition to inflation, Lagarde also focused on the euro area's economic growth outlook. She said the latest economic data show that the euro area economy continued to expand in the third quarter, but the risks to the overall growth outlook are tilted to the downside. "The renewed rise in energy prices has already hit consumer confidence, and higher financing costs may also weigh on economic growth." She pointed out that the euro area's services sector has recovered somewhat after weakening in the early stages of the Middle East conflict, and manufacturing, digital services and exports are benefiting from AI-related business investment. At the same time, government spending in infrastructure and defense is also supporting economic activity. However, rising energy prices are eroding households' real purchasing power, and persistently rising financing costs may restrain consumption and investment. ECB data show that the cost of debt financing through market issuance for euro area firms rose to 4.1% in August from 4.0% in July, while bank lending rates to enterprises remained at 3.8%. Demand for corporate loans declined in the third quarter, and banks further tightened credit standards for corporate loans. The real estate market has also been affected by high interest rates. Euro area mortgage rates rose to 3.6% in August from 3.5% in July, and household mortgage demand fell significantly in the third quarter. Lagarde said that tighter financing conditions may continue to restrain economic activity for some time and will also exert some downward pressure on inflation. According to a media survey of economists, euro area economic growth in the third quarter is expected to slow to 0.2%, with official data due to be released on Friday. No preset rate path; market bets on December hike probability rise to 88% Although Lagarde played down the risk of second-round inflation triggered by rising energy prices, she did not rule out the possibility of further rate hikes in the future. When discussing the ECB's future policy direction, Lagarde said the direction of monetary policy is clear. However, the ECB will still adhere to the principle of being data-dependent and deciding meeting by meeting, and will not commit in advance to a specific rate path. She stressed that future rate decisions will depend on the inflation outlook, changes in underlying inflation and the transmission of monetary policy. Since the Iran war shocked global energy markets, the ECB has raised rates twice. This pause in hiking reflects policymakers' desire to further observe the impact of rising energy prices and previous tightening measures on the economy. However, financial markets still widely expect the ECB to raise rates again in December. Interest rate market pricing shows that investors' expectations for a December hike have risen to 22 basis points, equivalent to a probability of about 88% of a 25-basis-point hike, up from 80% before Thursday's rate decision was announced. The euro was broadly flat near 1.1153 against the dollar. David Powell and Simona Delle Chiaie of Bloomberg Economics believe that despite the recent sharp rise in commodity prices, the overall tone of the ECB's policy statement this time is clearly dovish. They pointed out that the ECB Governing Council may be paving the way to end this tightening cycle, but still left room for another rate hike in December. News of early departure draws attention It is worth noting that on Thursday, news that Lagarde will step down early once overshadowed the ECB rate decision itself. According to reports, Lagarde plans to step down early as ECB President on February 7, 2027, drawing market attention to the future leadership arrangement for monetary policy. Currently, former central bank governors of Spain and the Netherlands are seen as potential successors.