European Central Bank President Christine Lagarde has signaled that inflation in the euro area will remain elevated for an extended period. In a recent interview, she stated, "This particular shock is expected to last longer. The Middle East conflict continues unabated. We anticipate ongoing market turbulence and energy price strain, even though rising costs themselves carry downside risks for the economy."

The ECB completed its second rate hike this week, following a surge in oil and gas prices sparked by the Iran conflict. Sources familiar with the central bank's deliberations indicated on Thursday that officials anticipate further increases to bring inflation, currently above 3%, back down to the 2% target.

According to a transcript released on the ECB's website on Saturday, Lagarde remarked, "This shock is profound and will likely persist longer than we initially projected." She noted that the Iran war, coupled with "impaired global refining capacity, particularly damage to Russian refining facilities," has driven up energy costs, which in turn pushes up prices across a range of goods. "Given this backdrop and the economy's inherent resilience, we must take action."

Joachim Nagel, head of Germany's central bank, suggested on Friday that the ECB might need to shift borrowing costs into mildly restrictive territory to manage price growth. Following Thursday's hike, the deposit rate now stands at 2.5%, a level many policymakers, including Chief Economist Philip Lane, consider close to the upper bound of the neutral rate.

New projections released by the ECB on Thursday show upward revisions for inflation expectations in 2027 and 2028, with 2028 inflation slightly above target. Growth forecasts were also upgraded, thanks to the euro area economy showing resilience against headwinds such as the Middle East conflict and US trade policies.

In the interview, Lagarde also touched on financial stability risks, saying, "Asset valuations in the artificial intelligence sector are at extremely high levels, as evidenced by the sheer volume of planned initial public offerings."

"There is an additional risk under evaluation: circular risks, such as linked transactions where one company holds shares in another, which in turn grants it chip supply contracts."

"A market correction is entirely possible. But when it might come, we simply do not know. European banks hold AI-related assets, but as I said, our financial system is far more robust than in the past."

Turning to fiscal policy, Lagarde emphasized, "France is among the countries planning structural reforms, and implementing them is crucial." She reiterated that the proposal from the far-left to slash France's massive debt by writing off central bank-held debt is not viable and carries significant financial risks.

When asked about a potential run for the French presidency, she responded, "That's flattering! But I have no intention of running." She also dismissed the idea of returning to national politics after her ECB tenure, adding, "You know, I will soon be 71. One must know when to step aside." She reconfirmed her departure from the ECB next year but did not specify whether she would serve until the end of her term in October 2027.