By David Barwick – FRANKFURT (Econostream) – The European Central Bank was obliged to raise interest rates because the energy shock was proving more persistent than initially expected and the euro area economy remained resilient, ECB President Christine Lagarde said Saturday.

“The ECB’s task is to maintain price stability,” Lagarde said in an interview with Ouest-France conducted at the Fête de la Pomme, the annual political gathering hosted by Normandy regional president and Les Centristes leader Hervé Morin.

“We have an inflation target of 2% over the medium term,” she said. “Today, inflation is well above 2%, at 3.3% in the euro area, and there has been a major shock that will probably last longer than we had expected.”

The conflict in the Middle East and the destruction of refining capacity around the world, particularly in Russia, had increased energy costs and consequently other prices, Lagarde said.

“In this kind of situation, and as we also have a resilient economy, we are obliged to react,” she said.

Lagarde acknowledged the argument that raising rates in response to an external shock could harm growth, but said it applied when the shock was short-lived.

“But the current shock is longer-lasting,” she said. “The conflict is continuing. We expect the volatility and pressure on energy prices to continue, even though the increase in prices also poses a risk of lower growth.”

Lagarde offered no indication of whether the ECB might raise rates again following Thursday’s unanimous 25bp increase in the deposit rate to 2.50%.

Asked about rising government borrowing costs, Lagarde attributed the increase in long-term interest rates partly to the general state of public finances, particularly in the United States.

Funding needs associated with artificial intelligence were also competing with sovereign borrowers for investors’ money and inevitably raising issuers’ costs, she said. However, the financial sector was much stronger than during the crises of 2008 and 2011, she said.

Lagarde said a correction in highly valued AI-related assets was “entirely possible,” although its timing was unknowable. She also cited the risk of circular financing arrangements in which one company invested in another that subsequently awarded it a contract to supply microchips.

European banks held AI-related assets, but the increased strength of the financial sector offered protection against the potential effects of a correction, she said.

Turning to France, Lagarde called for further administrative simplification and structural reforms, including pension reform, “whatever form it takes.”

“We can’t continue with the model of previous decades when life expectancy continues to rise,” she said.

Lagarde again rejected proposals to cancel French public debt held by the Banque de France, saying: “The idea is so absurd to me that I suspect it is an attempt to undermine the system under the guise of a technical argument, though it is nothing of the sort. It’s financially very dangerous, and it also happens to be a violation of the European treaties.”

Addressing her own future, Lagarde said she had attended Morin’s gathering “as a friend, a neighbor and a Norman to offer a European voice, without being a candidate for anything.”

Asked whether she would complete her ECB term, which expires in October 2027, Lagarde replied: “I will leave in 2027. I will say no more than that.”

She ruled out returning to French national politics after leaving the ECB.

“No. I’ll be turning 71 soon, you know,” she said. “You have to know when to call it a day.”