By David Barwick – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde on Monday rejected the idea that the Governing Council’s June rate increase was an “insurance hike”, saying the move was based on the inflation outlook and justified across all scenarios considered.

Speaking at the ECB Forum on Central Banking in Sintra, Portugal, Lagarde said the ECB had faced “an outlook of rising headline and core inflation” and projections showing inflation returning to the 2% target only in the last quarter of 2027, even then conditional on monetary policy adjustment.

“Our analysis showed that holding interest rates constant would have left inflation north of 2% in 2027 and 2028”, she said.

“This was a decision based on what we saw in front of us”, she said. “And our ability to take it with confidence, in an environment of considerable uncertainty, is the product of years of investment in our data, our indicators and our projections.”

Lagarde said the ECB had included a milder scenario in its June deliberations in which energy prices turned out lower than envisaged, in addition to adverse and severe scenarios prepared in March.

The scenario was added “precisely to capture the possibility that geopolitical shocks can unwind faster than expected”, she said, citing developments around the Strait of Hormuz.

“Our rate increase was justified under every scenario considered”, she said. “It was, by design, a robust decision. And nothing we have observed since then has called this assessment into question.”

Energy futures prices remained within the range of the scenarios modeled by the ECB, she said.

Lagarde said monetary policy had gone “back to basics”, with policy rates again the primary tool for stabilizing inflation, measured rate adjustments possible and decisions taken meeting by meeting.

“We no longer need to reach for unconventional instruments”, she said. “While we have them at hand, we can now focus on stabilizing inflation with policy rates as our primary tool.”

At the same time, Lagarde said the world in which the ECB was applying these basics was “fundamentally different” from before, with geopolitical shocks becoming more frequent and harder to read.

“We may therefore more often find ourselves in an intermediate zone, between shocks we can look through and those we must react to forcefully”, she said.

Inflation expectations would “always remain” a key part of the data monitored by the ECB, and any signs of de-anchoring in longer-term expectations would “undoubtedly warrant a reaction”, she said.

However, Lagarde warned against relying on expectations alone to calibrate policy in the intermediate zone.

Stable longer-term expectations could lead policymakers to delay responding to inflation already above target, while pre-emptive action against possible future de-anchoring offered “no reliable way” to gauge how far rates needed to rise, she said.

Lagarde said the ECB’s reaction function was guided by three criteria: the inflation outlook, underlying inflation dynamics and the strength of monetary policy transmission.

Because this reaction function was now well understood by markets, financial conditions could adjust before the ECB acted, giving policymakers time to assess shocks before committing to a course of action, she said.

“In times of uncertainty, forward guidance loses its value”, she said. “But framework guidance becomes more valuable.”