The President of the Central Bank Europe (ECB), Christine Lagarde, warned today that the eurozone’s economic situation remains fragile due to geopolitical vulnerabilities, though she firmly defended the central bank’s recent interest rate hike.
Speaking before the European Parliament’s Committee on Economic and Monetary Affairs in Brussels, Lagarde emphasized that while the tentative peace agreement in the Middle East is highly welcome, the situation on the ground remains unstable with persistent risks of setbacks or a renewed escalation.
She noted that the outlook remains highly uncertain, characterized by upside risks to inflation and downside risks to broader economic growth.
The central bank chief pointed out that the comprehensive, medium-term implications of the regional conflict on inflation and growth will ultimately depend on the overall intensity and duration of shocks to energy prices, as well as the magnitude of indirect and second-round economic effects.
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Addressing monetary policy just two weeks after the ECB decided to raise borrowing costs, Lagarde asserted that the decision is robust under all scenarios prepared by staff experts. She explained that a rate increase was fundamentally justified across every single analyzed forecast, positioning the central bank to effectively navigate the ongoing uncertainty generated by the conflict.
Looking ahead, Lagarde reiterated that the ECB will closely monitor developments and follow a strictly data-dependent, meeting-by-meeting approach to determine the appropriate monetary policy stance.
The economic warning comes in the wake of a preliminary agreement reached on June 14 between the United States and Iran aimed at halting hostilities in the Middle East and launching negotiations regarding the Iranian nuclear program, the lifting of economic sanctions, and regional security.
The deal outlines a framework for technical negotiations before any formal finalization, with its ultimate official implementation contingent upon both sides adhering to their respective commitments.
Prior to that diplomatic breakthrough, the ECB decided on June 11 to raise its key interest rates by 25 basis points to 2.25%. The move represented the central bank’s first rate increase in nearly three years, dating back to September 2023.
