TD Securities notes that President Lagarde used the ECB and Its Watchers conference to outline how the Governing Council is assessing the Middle East conflict shock. The bank says the ECB is effectively playing for time, watching selling price expectations and wage trackers. A forceful response is possible if inflation deviates persistently, but TD still looks for a hike toward end-2026.

Lagarde outlines patient reaction function

"President Lagarde's speech today at The ECB and its Watchers conference laid out a framework for how the Governing Council will be looking at the shock from conflict in the Middle East."

"Broadly speaking, her speech echoes the ECB's message last week, and those of some other Governing Council members, in playing for time before acting."

"Key to any policy response from the conflict is that the energy-price inflation shock would need to be seen spreading via second-round effects. Lane's speech today helpfully laid out the indicators flagged by Lagarde that the ECB will be closely watching, largely consisting of firms’ selling price expectations and wage trackers."

"Ultimately, Lagarde noted that a "forceful or persistent" response from the ECB is possible should inflation deviate significantly and persistently from target, but the conditions spelled out in this speech suggest a hike is not imminent."

"We continue to look for a hike toward the end of 2026."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)