European Central Bank President Christine Lagarde said euro-area inflation is likely to remain elevated for longer than previously expected, as the Iran war keeps pressure on energy prices. "The current shock is longer-lasting," Lagarde told Ouest-France in an interview published on Saturday, warning that continued conflict in the Middle East could keep energy markets volatile and prices elevated even as higher costs threaten economic growth. Her comments followed the ECB's second interest rate increase since the Iran war drove oil and gas prices sharply higher, lifting the deposit rate to 2.5%, with euro-area inflation currently above 3% and policymakers expecting further tightening may be needed to return price growth to the ECB's 2% target. New ECB projections released Thursday raised inflation forecasts for 2027 and 2028, with price growth in 2028 now expected to sit slightly above the central bank's target, while growth projections were also increased as the economy proved more resilient to the conflict and U.S. trade policies. Bundesbank President Joachim Nagel said Friday that borrowing costs may need to move into mildly restrictive territory to bring inflation under control, and Lagarde also flagged the possibility of a correction in elevated artificial intelligence sector valuations, called for planned French structural reforms to be implemented, repeated her opposition to canceling government debt held by central banks, and played down the prospect of running in France's presidential election while reiterating that she plans to leave the ECB next year.
ECB raised rates again to 2.5% and signaled further tightening may be needed, pushing the policy rate/yield higher.
ECB rate hikes and Nagel's call for mildly restrictive borrowing costs lift German 10Y yields.
