Lagarde says inflation to stay high, December hike in view

European Central Bank President Christine Lagarde said euro zone inflation will stay high in the coming quarters. She also said it would take "significant changes" to move policymakers off their expected course, which markets read as pointing to an interest rate increase in December. "We know that inflation numbers will remain high in the quarters to come," Lagarde told Japan's Yomiuri Shimbun in an interview conducted on November 4 and published by the ECB on Saturday. "The higher they are, and the longer they remain high, the greater the risk to our medium-term target."ecb.europa.eu

The comments add to signs that the ECB is preparing to tighten again. The bank held its deposit rate at 2.5% in late October even though headline inflation is running at twice its 2% target, Investing.com reported.investing.com

Energy drives the surge

Lagarde said October headline inflation of 4% was higher than the ECB had expected a few months ago but in line with market expectations. Most of the rise came from energy, where inflation climbed to 20.8% from 18.9% in September. She tied that increase to the conflict in the Middle East and to reduced global refinery capacity, according to the interview. Core inflation held at 2.5%, and services inflation edged up to 3.3%.ecb.europa.eu

On second-round effects, Lagarde said the ECB is "currently not seeing signs" of them beyond what is already built into its projections. She added that wage agreements and companies' wage expectations show no "evidence of a shift yet," a point also reported by Bloomberg and Il Sole 24 Ore. She noted that energy futures curves and long-term interest rates have risen since the September projections, though oil prices have come down more recently.bloomberg.com+1

December decision

"I cannot tell you today that we will for sure do this in December," Lagarde said. "What I know is that, on the basis of the information we have today, it would take significant changes for the direction of travel to be different from what I expect." A 25-basis-point move would be the third hike of the current cycle, Investing.com noted. The ECB will have updated economic projections at that meeting, The Edge Malaysia reported. On November 5 in Milan, Lagarde said "many indicators between now and December" would help determine whether a hike is needed. She spoke after the heads of the German and Italian central banks had signaled a move was likely, Reuters reported.theedgemalaysia.com+2

Leadership transition

The rate debate comes as the ECB changes leaders. Lagarde plans to step down in February 2027, about nine months before her term ends. Klaas Knot and Pablo Hernández de Cos are seen as the leading candidates to succeed her, according to Investing.com. In the interview, Lagarde said running for the French presidency is "not my plan," but that she wants to be able to "speak up in that debate," according to the ECB transcript.finance.yahoo.com+1