Lagarde speech: Indicators suggest economic activity will remain modest

Christine Lagarde, President of the European Central Bank (ECB), explains the ECB's decision to leave key rates unchanged at the July policy meeting and responds to questions from the press.

Key takeaways

"Recent data points to some improvement in economic activitiy."

"Activity in services partly recovered."

"Digital services robust, partly on AI."

"Firms, households expect labour market to remain weaker than before conflict."

"Indicators suggest economic activity will remain modest."

"Energy shock feeding into higher prices."

"Firms expect to raise selling prices."

"Underlying inflation contained, full effect yet to play out."

"Survyes indicate moderate wage growth."

"Rising labour productivity helps contain unit labour cost growth."

"Most measures of longer-term inflation expectations stand at around 2%."

"Energy inflation likely to keep inflation well above target into first half of 2027."

"Inflation will then decline."

"Conflict a major source of uncertainty."

"Risks to growth tilted to downside."

"Higher energy prices will weigh on real incomes."

ECB flags persistent inflation risks despite modest recovery

The FXS Speechtracker score of 5.6/10, slightly above the historic 5.2/10 baseline, points to a mildly more impactful and cautiously hawkish tone. Lagarde acknowledges some improvement in economic activity and a partial recovery in services, with robust digital services partly driven by AI, but stresses that overall activity will remain modest and the labour market weaker than before the conflict, keeping growth risks tilted to the downside.

The hawkish tilt comes from repeated emphasis on the energy shock feeding into higher prices, firms planning to raise selling prices, and energy inflation likely to keep inflation well above target into the first half of 2027 before declining. While underlying inflation is described as contained and wage growth as moderate, rising labour productivity only partly offsets unit labour cost pressures, and longer-term inflation expectations around 2% suggest the Euro area remains anchored but vulnerable to prolonged energy-driven inflation, limiting scope for rapid policy easing.