Christine Lagarde gave an interview to Ouest-France, published on 13 September, in which she said the current shock is longer-lasting, and that there has been a major shock that will probably last longer than we had expected.
She was specific about why. The war in Iran, and what she called the destruction of refining capacity around the world, especially in Russia. Those have raised energy costs, and energy costs drive all other prices. In that situation, with a resilient economy, she said, the bank is obliged to react.
It reacted last week, lifting the deposit rate to 2.5 percent in the second increase since the war began. Eurozone inflation is running above three percent. Fresh ECB projections point to faster inflation in 2027 and 2028, with 2028 now a touch above target, alongside stronger growth. Bundesbank president Joachim Nagel said borrowing costs may need to move into mildly restrictive territory.
The rate decision is the news. The sentence is the story.
In March, Lagarde told France 2 that the eurozone was in a better situation than in 2022, with greater capacity to absorb shocks, and that the bank would do what was necessary to ensure Europeans did not suffer the same increases as in 2022 and 2023. Six months later the framing is that the shock will probably last longer than expected. That is not a contradiction and nobody should score it as one. It is a central bank doing the thing central banks find hardest, which is publicly revising a duration estimate.
Duration is the variable that matters and it is the one nobody wants to name.
Every operator has an unspoken model of how long a bad thing will last, and the whole of their behaviour follows from it. If you believe your cost spike is three months, you absorb it, keep the menu, protect the relationship, and treat the hit as marketing spend. If you believe it is two years, you reprice, renegotiate the lease, change the supplier, and possibly change what you sell. Those are opposite responses to the same input, and the only thing separating them is a guess about time.
The dangerous zone is not being wrong. It is being unwilling to revise. Nobody sets out to absorb a two-year cost increase, but that is exactly what happens when you keep telling yourself it is nearly over, in three-month instalments, for eighteen months. The sign on the wall still says temporary because taking it down feels like an admission, and every month it stays up is a month of margin.
The refining detail in Lagarde’s remarks is the part worth internalising, because it is the difference between a price spike and a repricing. A blockade closes and shipping resumes. Destroyed refining capacity has to be rebuilt, which takes years and capital, and until it is the world has less ability to turn crude into the products people actually buy. That is a supply-side change to the structure of the market rather than a disruption to its flow.
Lagarde has also said, and it matters, that if firms face larger and more frequent shocks they may pass on cost increases more consistently. Which is to say the behaviour changes, not just the price.
She used the word probably, and she gave the reasoning rather than the reassurance. That is a better communication than the one that would have been easier to give.
Take the paper sign down. Order the brass one.
Source: Luxembourg Times, “ECB’s Lagarde says current inflation shock will be longer lasting”
