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“Some have characterized our rate increase earlier this month as
an ‘insurance hike,’" Lagarde said. “I'm sorry to disappoint
them. That is not an accurate description. We faced an outlook
of rising headline and core inflation.”
The central bank for the 21 countries that use the euro raised
its benchmark rate earlier in June by a quarter point to 2.25%,
the first rate move in a year. Even with higher rates, inflation
is projected to return to 2% only in the last three months of
2027. Euro area annual inflation was 3.2% in May.
Lagarde said, however, that the bank wouldn’t need the jumbo
half-point and three-quarter-point increases that it used to
squelch double-digit inflation after Russia cut off gas supplies
over the war in Ukraine.
Instead, better forecasting means the bank can go meeting to
meeting and take a more measured approach as it confronts the
fluctuating price pressures from the Iran war and the
interruption of oil and gas supplies through the Strait of
Hormuz. The bank has rate-setting meetings July 22-23 and Sept.
9-10.
The bank responded to the Russian gas cutoff with “the fastest
tightening cycle in our history, raising rates in increments we
had never used before,” she said in the text of a speech at the
bank’s annual monetary policy conference in Sintra, Portugal.
“We no longer need to act with the same force," she said. "We
can make measured adjustments to rates, calibrated to the shocks
we face.”
She said bank forecasters were now using scenarios of milder and
harsher outcomes to geopolitical events so that the bank could
make sure it doesn’t over- or underreact. Oil prices have
fluctuated wildly during the Iran war, while the European
economy has held up better than many expected against headwinds
from U.S. President Donald Trump’s imposition of new tariffs on
European imports.
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