Lagarde: Inflation "second round effects" force European Central Bank to take action, grateful that US-Iran ceasefire may lift energy alert.

Christine Lagarde, President of the European Central Bank, said in an interview that high energy prices are spreading to other sectors of the economy, and indirect effects of inflation have been clearly seen recently, especially the risks of "second-round effects" such as wage increases are emerging, and the European Central Bank will have to take action. At the same time, she welcomed the temporary ceasefire agreement reached between the United States and Iran, stating that if this agreement can lead to the reopening of the Strait of Hormuz, it would be "good news." Lagarde pointed out in the interview, "In recent weeks, we have seen the indirect effects of inflation almost everywhere. When we feel that the second-round effects - especially the risk of wage increases - are starting to emerge, we must take action." She added that the European Central Bank is particularly focused on potential inflation metrics. Just last week, the European Central Bank implemented its first interest rate hike since 2023 to address price pressures caused by the Middle East conflict. Policy makers did not rule out the possibility of further rate hikes at the July meeting. Bundesbank President Joachim Nagel and other policy makers believe that even if the conflict in Iran ends soon, prices could remain high for a longer period of time. European Central Bank Executive Board member Martins Kazaks also said in another interview that the central bank is ready to take further action at any time to prevent the spread of rising energy prices to the overall economy. In response to criticism from abroad, especially from France, that "raising interest rates will stifle economic growth," Lagarde responded, "I hear the criticism - often from France, and I understand them - saying 'you are taking measures, this will stifle growth.' But if inflation picks up, I must suppress it. Because once inflation gets out of control, putting it back in the bottle will be much more difficult and costly. Long-term inflation is unacceptable for consumers and businesses, and I will not be able to fulfill my mission." However, it is worth noting that just hours before Lagarde made the above remarks, the United States and Iran announced a preliminary agreement to end the war and reopen the Strait of Hormuz. The preliminary agreement led to a drop in oil prices, but the final fate of Iran's nuclear program is still left to follow-up negotiations. Lagarde commented, "If this news is confirmed in the developments in the coming days and the signing of a memorandum of understanding, that will be good news, and we welcome it, especially if it means the reopening and demining of the Strait of Hormuz." But she also cautioned, "The story is not over yet." "The entire issue of uranium enrichment still needs to be debated, agreed upon, and finalized in the form of an agreement." Lagarde also used a maritime metaphor to express her determination to fulfill her duty: "When the storm comes, the captain stays on the ship. So as the 'captain' of the European Central Bank, I am holding my position. The situation we are facing now, I hope it will improve with the possible agreements that may be reached in the Middle East conflict." She emphasized that her duty is to achieve price stability, which currently guides her actions. Regarding the domestic political situation in France, she said she would pay attention to related statements, and if she sees that France's position at the core of the EU is misunderstood, unilateral, or threatened by separatism, she will speak out, but categorically denied that she is a candidate for any position. Furthermore, Lagarde called for the advancement of the Eurozone Capital Markets Union (now renamed the "Savings and Investment Union"), stating that the key to its success lies in introducing common debt instruments to provide depth and liquidity to the market. "This is one of the keys to success for the United States - the strength of the dollar is due to the vast size of US Treasury bonds, giving investors liquidity. We do not have such tools yet. We are not incapable of doing it; we did it once during the response to the COVID-19 pandemic." She stated that there is no need to wait for another pandemic to do so, hoping that under the framework of economic and monetary union, member states can develop fiscal and economic cooperation around joint projects, thereby providing legitimate reasons for collective financing.