Lagarde: Geopolitical risks raise inflation, growth uncertainty

ECB President Christine Lagarde warned that geopolitical risks, particularly the war in the Middle East, are clouding the global economic outlook. She emphasized heightened uncertainty for growth and upside risks to inflation.

Inflation outlook revised up amid energy shocks

ECB President Lagarde highlighted that the global economy faces significant uncertainty, primarily from geopolitical and trade tensions.

The war in the Middle East, in particular, has led to a sharp increase in energy prices, posing upside risks to inflation and downside risks to global growth.

For the euro area, headline inflation rose to 2.6 percent in March, up from 1.9 percent in February, driven by energy.

The latest ECB staff projections now foresee headline inflation averaging 2.6 percent in 2026, revised up from December projections due to higher energy prices.

Real GDP growth for the euro area is projected at 0.9 percent this year, with risks tilted to the downside.

The Governing Council maintained key interest rates in March, reiterating its commitment to a 2 percent medium-term inflation target.

Lagarde emphasized a data-dependent, meeting-by-meeting approach, not pre-committing to any specific rate path.

Digital euro and financial resilience in focus

The euro area financial stability outlook remains shaped by elevated geopolitical tensions.

While the banking system has shown resilience, vulnerabilities persist, particularly among non-bank financial intermediaries (NBFIs) exposed to illiquid assets.

Lagarde emphasized regulatory modernization and strengthening the NBFIs policy framework.

The Eurosystem's comprehensive payments strategy aims to adapt central bank money to the digital age.

This includes the digital euro for retail payments and the Pontes and Appia projects for tokenised central bank money in wholesale markets.

The Eurosystem also enhanced its repo facility (EUREP), offering standing access to non-euro area central banks from Q3 2026 to provide backstop euro liquidity.

Navigating a new era of uncertainty

Lagarde's statement paints a clear picture of a central bank grappling with a complex, multi-faceted crisis.

The emphasis on data-dependency, while standard, underscores the deep uncertainty surrounding both inflation and growth paths.

This environment demands agile policy responses, but also highlights the limits of monetary policy in addressing fundamentally geopolitical and structural challenges.