ECB ready to hike rates even if expected inflation surge is short-lived, Lagarde says

The head of the European Central Bank said Wednesday that policymakers stand ready to hike interest rates even if an expected jump in euro zone inflation proves temporary.

ECB President Christine Lagarde said a "not-too-persistent" rise in inflation could trigger a hike after the bank was forced to upgrade expectations for euro zone inflation, which is now forecast to rise above the 2% target.

"If the shock gives rise to a large, though not-too-persistent, overshoot of our [inflation target, some measured adjustment of policy could be warranted," Lagarde told an audience at "The ECB and Its Watchers" conference in Frankfurt, Germany.

"To leave such an overshoot entirely unaddressed could pose a communication risk: the public may find it difficult to understand a reaction function that does not react," she added, without giving a timeline or criteria for when the central bank might deem an interest rate hike necessary.

Before the Iran conflict erupted in late February, the euro zone's inflation rate had dipped below the central bank's 2% target. In February, however, the rate ticked up to 1.9%.

The war, and Tehran's retaliatory and almost total block of the Strait of Hormuz, have sent global oil and gas prices soaring and upended inflation forecasts in Europe.

The ECB said last week -- when it kept its key deposit rate at 2% — that it now expected headline inflation to average 2.6% in 2026, 2% in 2027 and 2.1% in 2028 in its baseline scenario.

In its more "adverse" scenario, the central bank warned that inflation could peak at 4% this year while in the most "severe" base case (assuming a stronger and more persistent energy price shock and further significant destruction of Gulf energy infrastructure), the rate could peak above 6% early next year.

"If we expect inflation to deviate significantly and persistently from target, the response must be appropriately forceful or persistent," Lagarde said Wednesday.

Separately on Wednesday, the ECB's chief economist Philip Lane said companies' price-hike expectations and wages for new hires were some of the key inflation indicators that the ECB will monitor.

There are already signs that the war in Iran is harming business confidence and activity, with private sector output in the euro zone's manufacturing and services sectors sinking to a 10-month low in March, according to S&P Global flash purchasing managers' index data released on Tuesday.