ECB’s Lagarde says inflation remains stable but warns Iran conflict is slowing economic activity

European Central Bank President Christine Lagarde said inflation expectations in the euro area remain stable and there is no sign of de-anchoring that would require stronger policy action. She also said there is no evidence of second round effects becoming strong enough to change the current monetary stance. At the same time, she warned that geopolitical tensions, including the Iran conflict, are beginning to weigh on economic activity, especially in the services sector.

ECB confirms inflation expectations remain stable with no need for aggressive policy tightening

Christine Lagarde said there is currently no evidence that inflation expectations are becoming unanchored in the euro area economy.

She also said there are no strong second round effects visible yet. Second round effects refer to situations where higher prices lead to higher wages, which then create further inflation pressure. According to her, this cycle is not currently strong enough to justify more aggressive monetary tightening.

Lagarde added that the central bank remains confident that inflation will return to its target level over time if appropriate monetary policy is maintained. This suggests the ECB sees its current strategy as sufficient for now, without needing sudden or forceful policy shifts.

She also pointed out that the current inflation shock appears smaller compared to previous major inflation episodes. This indicates that price pressures are still present but not escalating at the same intensity as before.

ECB highlights mixed economic risks as inflation uncertainty and growth slowdown both persist

Lagarde said the economic outlook for the euro area remains uncertain, with risks balanced on both sides. On one hand, there are upside risks to inflation. On the other hand, there are downside risks to economic growth.

This means inflation could still rise more than expected in certain scenarios, especially if energy prices or supply disruptions worsen. At the same time, economic activity could weaken if demand slows further across key sectors.

This type of environment creates a difficult situation for central banks. If policy remains too tight for too long, growth can slow significantly. If it becomes too loose, inflation can rise again.

The ECB is therefore continuing a cautious approach, closely monitoring incoming data such as wage growth, energy trends, and service sector performance before making any major decisions.

Iran conflict adds pressure on euro area economy as services sector shows slowdown

Lagarde also said that the ongoing Iran conflict is already affecting economic activity. She specifically noted that data suggests a slowdown, especially in the services sector. The services sector is often one of the most sensitive parts of the economy. It includes tourism, hospitality, transport, and consumer services, all of which can weaken quickly when geopolitical uncertainty rises.

Conflicts can also indirectly impact Europe through energy prices and trade disruptions. Even the expectation of instability can reduce business investment and consumer confidence.

According to Lagarde, these pressures are starting to show in economic data, suggesting that growth momentum may be weakening in the short term.

ECB policy outlook remains cautious as markets watch the inflation and growth balance

The overall message from the ECB remains balanced but cautious. Inflation is not seen as out of control, but growth risks are becoming more visible due to external geopolitical pressures.

Markets will now focus on whether this slowdown in services expands into broader economic weakness across the euro area. The key question going forward is whether inflation stability continues while growth softens, or whether one of these risks becomes dominant in the coming months.

For now, the ECB is signaling patience. Policy will likely remain data dependent, with no immediate push toward aggressive tightening or easing unless conditions shift sharply in either direction.