ECB's Lagarde: second-round effects absent, but waiting is not an option

At the margin, Lagarde’s comments carry a hawkish tilt. If wage settlements harden, a monetary authority that responds to initial signals rather than waiting for second-round effects to be clearly visible could tighten more quickly than investors anticipate. For front-end European yields and the euro, that picture is supportive on a relative basis. The key channel for transmission is energy. Since energy prices are the main driver of inflation, an additional surge in oil or gas caused by Gulf escalation would increase the chances of pre-emptive tightening, leaving crude and TTF gas as direct inputs into ECB pricing. Nothing in what Lagarde said about France signals a backstop, leaving the French-German yield spread at the mercy of budget politics in Paris.

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In her view there is no wage-price spiral so far; still, she has stressed that the ECB will react to the first tell-tale signs instead of waiting for confirmation.

Summary:

• ECB President Christine Lagarde said energy prices are the dominant, though not the only, reason inflation has been rising
• The ECB, she said, cannot hold out until second-round effects are plain to see even though none have materialised so far, and it will instead search for early warnings
• Wage expectations built into collective bargaining agreements are serving as an early-warning gauge for the ECB
• When the subject of French debt came up, Lagarde’s answer was that French fiscal policy must provide the first and main remedy
• Euro area growth of 1.1% in 2026 is not brilliant but not bad in her view, and she also ruled out seeking the French presidency

Higher energy prices have not yet generated second-round effects in the euro area, according to ECB President Christine Lagarde, who said the central bank would respond before those effects were fully apparent.

Energy costs, Lagarde noted, are behind most of the rise in inflation, though not all of it. Those increases have not yet shown up in wages and prices more broadly, but policymakers, she said, still need to stay ahead of events and watch for the first clues. Collective bargaining arrangements, the place where expectations of higher wages usually emerge first, are getting particular scrutiny from the ECB.

When an original price shock — a jump in energy costs, for example — leads employees to press for higher wages and businesses to mark up prices once more, a second-round effect is under way, and a short-lived spike can become longer-lasting inflation. Her insistence on moving while those effects are still not fully visible points to a willingness to tighten early if wage deals begin to harden.

On the economy, Lagarde called growth not brilliant, while saying the 1.1% euro area growth in 2026 is not a bad outcome.

When questioned about France’s debt, her answer was that the first and main solution rests with France’s fiscal policy. That shifts responsibility toward Paris and away from the ECB at a time when French borrowing costs are under strain. Goldman Sachs, in a recent client discussion, pointed to a sharp widening in the gap between French and German government bond yields amid political friction over the French budget, and the bank sees that as a problem likely to persist in the run-up to the French presidential election in the first half of next year.

Lagarde, a French national, added that she will not be a candidate in France’s presidential contest.

Energy prices and wage negotiations therefore emerge from her comments as the main gauges for the ECB’s next steps. If energy costs climb again, or wage claims show early signs of firming, the case for policy action before inflation takes hold would become stronger.