ECB President’s speech on monetary policy amid geopolitical tensions

Christine Lagarde, President of the European Central Bank (ECB), delivered a speech at the hearing of the Committee on Economic and Monetary Affairs of the European Parliament.

She reviewed recent economic data, noting that euro area GDP grew by 0.3% in the first quarter of 2026, but the war in the Middle East has since weighed on activity, especially in services. Manufacturing has remained resilient due to inventory building and increased defense spending.

Projections indicate real GDP growth of 0.8% in 2026, 1.2% in 2027, and 1.5% in 2028. Domestic demand is expected to be weaker due to lower confidence and higher energy costs, but household balance sheets remain solid, supporting consumption and investment in digital technologies, defense, and infrastructure.

Inflation rose to 3.2% in May, driven mainly by energy prices exceeding 10%. Inflation expectations over short horizons have increased but remain around 2% for the long term, supporting inflation stabilization around the target.

The ECB raised key interest rates by 25 basis points in June to ensure inflation returns to the 2% target. The decision was based on a data-dependent approach, considering inflation outlook and risks, without pre-committing to a specific rate path.

Lagarde explained the ECB’s monetary policy strategy in environments with frequent supply shocks, emphasizing three principles: assessing the nature of shocks, considering risks around the baseline, and tailoring policy responses proportionally. The current approach is to respond gradually, adjusting based on incoming data and evolving conditions.

She highlighted that supply shocks are increasingly frequent and that the ECB’s strategy provides a framework to manage risks and calibrate responses. Strengthening energy sector resilience is essential to reduce vulnerability to external shocks.

Lagarde concluded by thanking the committee for progress on the Single Currency Package and the digital euro project, emphasizing the importance of democratic debate in advancing these initiatives.