Headline inflation warning from the European Central Bank

Lagarde spoke at the Monetary Dialogue session of the European Parliament's (EP) Committee on Economic and Monetary Affairs held in Brussels.

"The world has entered a period of rapidly increasing challenges," said Lagarde, explaining that a new geopolitical landscape fueled by tensions in the global economy has emerged.

Lagarde stated that the climate crisis is also continuing to accelerate, leading to frequent and unprecedented natural disasters, and that extreme weather events are exacerbating existing challenges by triggering supply shocks that reflect on the global economy.

Reminding that policymakers must be open-minded, Lagarde pointed to the importance of central banks acting consistently.

Lagarde assessed that "Eurozone economic activity has stagnated in recent quarters and is expected to remain weak for the rest of the year."

Reminding that real gross domestic product (GDP) in the Eurozone contracted by 0.1 percent in the third quarter, Lagarde said this situation is a reflection of high interest rates, weak external demand, and the decline in the momentum of economic reopening following the COVID-19 pandemic.

Pointing out that the short-term outlook is weak, Lagarde expressed that the economy is expected to strengthen again in the coming years as inflation falls further, household incomes recover, and demand for Eurozone exports increases.

Noting that inflation in the Eurozone fell to 2.9 percent in October, Lagarde said, "This decline reflected a general drop in inflation, but base effects also helped."

STRONG WAGE PRESSURES

Lagarde pointed out that wage pressures remain strong and that they expect wages to continue to be the main factor driving domestic inflation, adding, "Looking ahead, although we think headline inflation may rise slightly again in the coming months due to base effects, we expect the weakening in inflationary pressures to continue. However, the medium-term outlook for inflation remains surrounded by significant uncertainty."

Emphasizing that they are determined to ensure inflation returns to their 2 percent medium-term target, Lagarde stated that keeping interest rates at current levels for a sufficiently long period will make a significant contribution to restoring price stability.