Lagarde: Contagion from US bank failures may hit eurozone

European Central Bank President Christine Lagarde has warned that financial tensions in the wake of a banking crisis in the US may hit the eurozone.

"Inflation is still high, and uncertainty around its path ahead has increased. This makes a robust strategy going forward essential," Lagarde said in a speech on Wednesday.

The ECB last week decided to raise its interest rates by a further 50 basis points, shrugging off turmoil in the banking sector after three US lenders went under and Swiss giant Credit Suisse needed a last-minute rescue.

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Lagard said the ECB's interest rate increases were just starting to take effect on the economy but their effect may become stronger as a result of banking turmoil.

Investors are pondering whether the ECB will be able to continue raising rates to fight high inflation despite turmoil in the banking sector.

"Those tensions have added new downside risks and have made the risk assessment blurrier. More generally, many of the assumptions in the projections, such as those on fiscal policies and energy and food prices, are volatile. This implies additional uncertainty around the baseline for both growth and inflation," Lagarde said.

Faced with "high uncertainty," future decisions would depend on the data, she said, refraining from making a commitment to raise rates further.

After Russia began its special military operation in Ukraine in February 2022, eurozone inflation soared, prompting the Frankfurt-based ECB to embark on an unprecedented campaign of monetary tightening, raising interest rates by 350 basis points since last July to curb inflation.

UK inflation unexpectedly rises

On Wednesday, the UK’s Office for National Statistics (ONS) said inflation in Britain unexpectedly accelerated in February, as food and energy bills continued to rise, placing further pressure on households.

The UK’s Consumer Price Index (CPI) increased by an annual 10.4 percent above the 9.9 percent consensus forecast among economists in a Refinitiv poll and up from 10.1 percent in January.

“The largest upward contributions to the monthly change in both the CPIH and CPI rates came from restaurants and cafes, food, and clothing, partially offset by downward contributions from recreational and cultural goods and services (particularly recording media), and motor fuels,” ONS said. 

The CPI, including owner occupiers’ housing costs (CPIH), rose by 9.2 percent in the 12 months to February 2023, up from 8.8 percent in January.

The unexpected increase in February marked a break from three consecutive months of slowing price increases since the 41-year high of 11.1 percent reached in October.

In the meantime, British households continue to struggle with high food and energy bills, while workers across a range of sectors have launched mass strike action in recent months amid disputes over pay and conditions. 

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