By Marta Vilar – MADRID (Econostream) – European Central Bank President Christine Lagarde said on Monday that a “measured” monetary policy response remained appropriate following this month’s 25bp rate hike, with higher energy prices pushing up the inflation outlook but no evidence so far that the shock was becoming embedded.

“We remain in the ‘middle path’ for monetary policy that I laid out earlier this year,” Lagarde said in a speech at the Hearing of the Committee on Economic and Monetary Affairs of the European Parliament. “This means that while the shock is too large to look through, we view a measured response as appropriate to keep inflation in check.”

Lagarde said the ECB’s assessment of its three policy criteria showed higher inflation ahead but “no signs yet that it is becoming embedded.”

“The inflation outlook will be higher in 2027 and 2028 than we expected a few months ago, mostly due to higher energy prices. But we do not see evidence at this stage of energy prices feeding into higher wages,” she said.

Lagarde also pointed to a notable rise in long-term interest rates since the ECB’s September meeting, saying this would slow growth and reduce the pass-through of the energy shock by more than projected in the September forecasts.

“When facing energy shocks, the ECB has a very clear strategy: we do not react to energy prices, we react if we see risks of higher energy prices becoming embedded in inflation,” she said.

According to Lagarde, wages had not shown a “material response to the energy shock” so far, as compensation per employee slowed to 3.3% in the second quarter from 3.6% in the first.

She said the outlook remained surrounded by high uncertainty, with upside risks to inflation and downside risks to growth.

Regarding the euro area economy, she said it had remained resilient despite the energy shock, with solid and broad-based growth in the second quarter and a similar pattern expected in the third.