Lagarde warns inflation shock will last longer than expected

The European Central Bank raised its key interest rates by 25 basis points on Thursday, September 10, bringing the deposit facility rate to 2.50% as ongoing conflict in the Middle East continues to drive energy prices higher and reignite inflation across the eurozone.global.morningstar+2

ECB President Christine Lagarde called the decision "a no-brainer," noting it was made unanimously by the Governing Council. In a subsequent interview with Ouest-France published Saturday, Lagarde warned that "the current shock is longer-lasting" than previously anticipated, citing sustained volatility in energy prices tied to the Middle East conflict.reuters+2

A Second Hike in 2026

The move marks the ECB's second rate hike this year, following an initial increase in June that was the first since 2023. Starting September 16, the deposit rate will stand at 2.50%, the main refinancing rate at 2.65%, and the marginal lending facility at 2.90%.cnbc+3

Updated ECB staff projections now see headline inflation averaging 3.0% in 2026, 2.5% in 2027, and 2.1% in 2028, with the 2027 and 2028 figures revised upward from earlier forecasts. Core inflation excluding energy and food is projected at 2.5% in 2026 and 2.6% in 2027. On the ECB's own explainer page, the bank acknowledged that inflation would remain "well above" its 2% target over the coming year, with a return toward target expected only "towards the end of 2027".global.morningstar+3

Markets Price In More Tightening

Investors have responded by boosting bets on further rate increases. According to Morningstar, market pricing now implies a roughly 75% probability of another hike at the ECB's October 29 meeting. Oil prices have climbed above $100 a barrel following drone attacks that temporarily shut Saudi Arabia's East-West pipeline, adding to the inflationary backdrop.benzinga+1

Skeptics Push Back

Not all analysts share the ECB's urgency. ING economist James Smith wrote that Lagarde's assertion that inflation will be "longer lasting" than expected "stands in sharp contrast to what both the inflation figures and corporate pricing surveys are telling us". He noted that the full impact of an energy shock typically takes 12 to 18 months to materialize, and that wage growth remains "relatively subdued across most major economies," limiting the risk of a self-reinforcing inflation spiral.investing

The Federal Reserve faces its own decision next week, with traders pricing in roughly a 64% probability of a 25-basis-point hike at the September 15–16 meeting.fxstreet