Lagarde speech: Inflation to return to target towards end of 2027
Christine Lagarde, President of the European Central Bank (ECB), explains the ECB's decision to raise key rates by 25 basis points (bps) at the September policy meeting and responds to questions from the press.
ECB highlights resilient Eurozone growth but flags persistent inflation risks
The FXS Speechtracker score of 6.4 versus a 6.0 historic average signals a mildly more confident tone as the ECB President Lagarde underscores resilient growth, robust labour markets and an improved near-term outlook, even as employment gains slow and exports face competitiveness headwinds. The emphasis on consumption, public and private investment, and a recovered services sector leans modestly hawkish by reducing perceived urgency for rapid easing.
At the same time, guidance that headline inflation will stay above target through the first half of 2027, with energy shocks feeding into core and food, reinforces a hawkish bias despite longer-term expectations anchored near 2%. For Euro traders, the combination of stronger growth and sticky inflation argues for a higher-for-longer policy stance, while downside risks from wars, energy disruptions and climate-related food price shocks temper the hawkish tilt and may cap Euro upside on risk-off episodes.
Key quotes
"Economy proving resilient."
"Resilience likely to persist into Q3."
"Manufacturing is solid."
"Consumer confidence rebounded."
"Services sector recovered."
"Labour market is robust."
"Growth in employment continues to slow."
"Near-term growth outlook has improved."
"This reflects resilience of consumption, public investment."
"Growth will be bolstered by business, housing investment."
"Exports held back by competitveness challenges, trade policies."
"Refining margins made strong contribution to inflation."
"Rising labour productivity has helped contain growth in unit labour costs."
"Wage tracker points to modest uptick in negotiated wage growth."
"Inflation expectations over shorter horizons remain at elevated levels."
"Most measures of longer-term inflation expectations stand at around 2%."
"Headline inflation to remain above target through first half of 2027."
Higher energy prices to feed throught to core, food gradually."
"Better economic outlook to feed into core."
"Headline inflation to return to target towards end of 2027."
"Risks to the growth outlook are to the downside."
"Downside risk due to Middle East war, Ukraine."
"Energy disruptions, worsening market sentiment, trade frictions among risks to growth."
"The energy shock could intensify further and its effects on other prices and wages could be stronger than currently expected."
"Extreme weather events, potentially reinforced by intensifying El Niño conditions, and the unfolding climate and nature crises more broadly, could drive up food prices."
"Gas prices, in particular, could increase in the event of further supply disruptions or an unusually cold winter coinciding with low storage levels."
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
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