Global Market: ECB's Lagarde says eurozone inflation has yet to trigger second-round effects

European Central Bank President Christine Lagarde said that Eurozone inflation has not yet generated significant second-round effects, meaning there is no clear evidence that higher energy prices are feeding into wages and becoming embedded in broader price pressures, Reuters reported.

Inflation in the euro zone has already risen above 3% and could approach 4% by the end of the year, according to the outlook cited in the discussion, putting price growth at roughly twice the ECB's 2% target. The increase has fuelled market expectations of as many as four additional interest-rate hikes over the coming year, following two rate increases during the summer, Reuters reported.

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Energy prices driving inflation
Lagarde pointed to surging oil and gas prices linked to the US-Iran conflict as the main factor behind the recent increase in inflation. She said the ECB was monitoring the shock closely but had not yet seen evidence of it spreading into wage growth.

Reuters reported that Lagarde's comments pushed back against some of the more aggressive expectations for further monetary tightening, with the ECB chief indicating that a measured policy response remained appropriate as long as inflation expectations and wage pressures stayed contained.

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ECB seen taking a cautious approach
Lagarde also acknowledged that the risks to the inflation outlook were tilted to the upside and that uncertainty remained elevated.

The ECB's description of a "measured response" does not specify the size or timing of future rate increases. However, economists cited by Reuters see the bank's first two hikes, which were spaced three months apart, as a potential guide for the next steps.

That view has led many economists to expect the ECB to leave interest rates unchanged at its October 29 meeting and potentially raise them in December, when the central bank is scheduled to publish updated economic projections.

Growth outlook remains resilientOn the broader economy, Lagarde maintained a relatively positive assessment. Manufacturing activity remains solid, while the labour market continues to show resilience, Reuters reported.

Investment is also expected to provide support to economic growth, potentially helping the euro zone absorb the impact of higher energy costs.

The ECB therefore faces a delicate policy balance: inflation risks have increased sharply because of the energy shock, but the absence so far of clear wage-driven second-round effects gives policymakers room to avoid an overly aggressive response.

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