Lagarde Says Europe’s Economy Has Slipped Below ECB Baseline

ECB's Christine Lagarde says that the economy is between the ECB's baseline and adverse scenarios. She spoke exclusively with Bloomberg's Francine Lacqua about the higher price of energy amid the war in Iran, bruised economic sentiment, and the path forward for ECB's monetary policy. President Christine Lagarde said higher energy costs have pushed the euro zone away from the European Central Bank’s base-case outlook, though not enough yet to warrant leaning toward raising interest rates.

“We are in between the baseline and the adverse” scenarios for the Iran war, Lagarde told Bloomberg Television on Tuesday in Washington, where she’s attending the IMF’s spring meetings.

Asked whether that means the ECB now has a bias toward tightening monetary policy, she said it doesn’t. “We have a compass which indicates price stability predicated on financial stability,” Lagarde said.

WATCH: ECB President Christine Lagarde says the euro-zone economy has moved away from the central bank’s Iran war base case, though not enough to currently warrant leaning toward raising interest rates.

The ECB is weighing what action is needed following 6 1/2 weeks of fighting in the Middle East that’s sent oil prices soaring and bruised economic sentiment. Headline inflation in Europe has already jumped well beyond the 2% target. The key question is how persistent the spike will prove.

Markets reckon rate hikes are only a matter of time. But with the fate of peace talks between the US and Iran up in the air, they don’t foresee an increase at the next meeting on April 29-30.

Traders are betting on two full quarter-point hikes this year, with about a 30% chance of a third, compared with wagers on as many as four such increases a week ago. German two-year yields, which are sensitive to policy changes, fell as much as 11 basis points to 2.54%.

“We have to be completely agile and ready to move in the direction that is required,” Lagarde said. “We have to be data dependent, as we have repeatedly said, but it does not predicate as we speak today that we will go in one direction or the other. And it certainly doesn’t determine a rate path that I can confirm today.”

New IMF projections published earlier Tuesday may add some clarity, suggesting faster global inflation alongside more meager growth. In the 21-nation euro zone, consumer prices are seen rising 2.6% this year — matching the ECB’s own forecast.

Several officials from the Frankfurt-based central bank deem that baseline outcome less likely as the conflict drags on and the closure of the Strait of Hormuz worsens.

That would bring closer the adverse scenario drawn envisaging inflation peaking at 4.2%. Should the situation deteriorate further still, a severe scenario includes a short recession and price gains topping 6%. For now, officials are watching how strongly higher energy costs feed through to other parts of the economy, keeping a particular eye on things like wage demands, which rose dramatically after inflation exceeded 10% in the wake of Russia’s attack on Ukraine in 2022.

“We’ve said very clearly that we would need data to act, but that we would not hesitate to act,” Lagarde said. “It really captures well the position that we have. We need the data in order to analyze whether it’s a see-through, it’s going to be short-lived, we will get back to the past, if you will. Although I don’t think that’s actually possible.”

--------

Watch Bloomberg Radio LIVE on YouTube

Weekdays 7am-6pm ET

Follow us on X

Subscribe to our Podcasts:

Bloomberg Daybreak

Bloomberg Surveillance

Bloomberg Intelligence

Balance of Power

Bloomberg Businessweek

Listen on Apple CarPlay and Android Auto with the Bloomberg Business app:

Apple CarPlay

Android Auto

Visit our YouTube channels:

Bloomberg Podcasts

Bloomberg Television

Bloomberg Originals