Lagarde Says Energy Shock Too Big for ECB to Ignore

European Central Bank President Christine Lagarde has warned that the energy price shock triggered by the Middle East conflict is too large for policymakers to simply wait out, while urging euro area governments to keep any fiscal support for households and companies short-lived and narrowly aimed, the ECB said in a statement delivered at the IMF Annual Meetings on Saturday.

Speaking to the International Monetary and Financial Committee, the IMF’s ministerial-level steering body, Lagarde said the shock was too large to “look through” but that a measured response remained the right approach to keep inflation in check. The ECB has already raised its key interest rates by 25 basis points twice this year, in June and again in September.

Lagarde – Inflation well above target

According to the statement, headline inflation in the euro area climbed to 3.8% in September, driven mostly by a surge in energy costs, while core inflation edged up to 2.5%. Lagarde said headline inflation was expected to remain well above the ECB’s 2% goal into the first half of 2027 before returning close to target towards the end of that year.

She added that the central bank had so far found no sign of significant spillover from energy prices into wider prices and wages beyond what was already built into its projections, and that wages had not responded materially to the shock. However, she cautioned that a more intense or longer-lasting energy shock could strengthen second-round effects and leave inflation higher for longer.

Lagarde also pointed to a tightening in financing conditions, with long-term interest rates rising notably since the committee’s previous meeting. That, she said, is likely to slow growth and dampen price pass-through more than the ECB had assumed in its September forecasts, which project euro area growth of 0.9% in 2026, 1.4% in 2027 and 1.5% in 2028.

Message to governments

On fiscal policy, the ECB chief called on governments to ensure any response to the energy shock is temporary, targeted and tailored, and said countries carrying high debt should continue consolidating their finances and re-prioritise spending. She noted that rising state outlays on infrastructure and defence, alongside investment in artificial intelligence and digital technologies, had helped support broad-based growth in the first half of the year.

Lagarde described the global economy as surprisingly resilient despite high uncertainty, but said risks to growth were tilted to the downside and risks to inflation to the upside, citing the Middle East conflict and Russia’s war in Ukraine. She also said trade tensions and protectionist measures were weighing on confidence and reshaping global trade flows, and called for a return to an open, predictable and rules-based international economic order.

On financial stability, the statement said risks in the euro area remain high, flagging stress in private credit, where some funds have reported outflows and reactivated redemption gates, although euro area institutions have limited direct exposure. It added that new frontier AI models had increased cyber and operational risks.

What’s next

Lagarde said the ECB would make a comprehensive assessment of incoming data under its reaction function, leaving the door open to further action. She also reiterated that the ECB plans to run a 12-month internal pilot of the digital euro in the second half of 2027, and that EU adoption of the digital euro regulation by the end of 2026 is key to keeping that timetable on track.

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