FRANKFURT, June 22 (Reuters) - The inflation shock facing the euro zone is too large to ignore but not yet large enough to push up longer-term price bets or generate dangerous second-round price effects, European Central Bank President Christine Lagarde said on Monday.
The ECB raised interest rates on June 11 after inflation rose above 3%, and investors are now speculating whether the bank will move again to contain price pressures and prevent expectations from moving away from its 2% target.
Lagarde, who earlier described three scenarios for action, said on Monday the currency bloc was experiencing the middle of these scenarios: of a not-too-persistent overshoot that required some measured policy adjustment.
"For now, we are in the second case," she told a European Parliament committee hearing. "The shock is too large to look through without jeopardising our target."
"But we see no evidence yet of de-anchoring of inflation expectations or second-round effects that would warrant a more forceful policy response at this stage."
MARKET SEES ECB RATE STAYING IN 'NEUTRAL' RANGE
Although she made no explicit reference to any further steps, the comments are likely to reinforce bets that, even if more tightening is possible, the ECB's key rate is not expected for now to exceed the neutral range: the level that neither restricts nor stimulates growth.
This range is now seen between 1.75% and 2.50%, with the deposit rate now at 2.25%.
Financial markets have priced between one and two more hikes, with the next move fully priced in by the end of this year.
Lagarde said the bank would remain agile based on data and would adjust its response as the shock evolved.
But she also said that the current shock appears to be smaller than the 2021/22 episode when the bank had to raise rates at a record pace, and the context is also different given a stronger labour market, higher incomes and the absence of post-pandemic supply challenges.
Still, the ECB must not be complacent because wage formation may be more sensitive to new shocks given the bloc's recent experience with high inflation, Lagarde added.
Repeating the bank's outlook for growth, Lagarde argued that investment, particularly into AI, was holding up and households also had strong balance sheets, providing some cushion for an economy that is still bound to suffer from the fallout of higher energy costs.
"The outlook remains uncertain, with upside risks for inflation and downside risks for economic growth," Lagarde said.
Reporting by Balazs Koranyi Editing by Gareth Jones
