ECB Signals Rate Hike Risk as Lagarde Warns Against Broad Energy Aid

Christine Lagarde has warned that excessive government support for households facing rising energy costs could force the European Central Bank to raise interest rates more than expected. Speaking in Berlin, she said broad support across income groups can sustain demand, allowing firms to pass on higher costs and worsening inflation. She stressed that uncertainty from the Middle East conflict remains high, making it difficult to assess the full economic impact. Eurozone inflation rose to 2.6% in March, from 1.9% in February as energy prices surged following attacks on Iran by the U.S. and Israel. Governments had previously provided support equal to 2.5% of economic output during the 2022 crisis. Lagarde urged targeted and temporary aid for vulnerable households, warning that wider support could increase inflation further. The ECB’s baseline forecast sees inflation at 2.6% this year, but in a worse scenario, it could reach 3.5%, raising the likelihood of interest rate hikes.