ECB's Lagarde: Euro zone resilience allows more room for rate hikes

ECB President Christine Lagarde said the euro zone economy has grown more resilient to shocks, giving the central bank greater scope to raise interest rates without triggering financial instability. The comments, delivered in a speech Monday, reinforce the hawkish message that has defined the ECB's tightening cycle.

Lagarde argued that structural changes in the bloc's economy, including stronger bank capital positions and less fragmentation risk, mean higher rates no longer carry the same danger of causing a credit event. She did not specify a terminal rate level or a timeline for further moves. Her language suggests the central bank sees the current 4% deposit rate as a baseline from which it can continue hiking if inflation data demands it.

The simple read is that Lagarde is opening the door for more tightening without alarming markets about financial stability. The better read is about the euro's transmission mechanism. A more resilient economy reduces the risk of a policy mistake that would force the ECB to reverse course, traders said. That lowers the tail risk of a sharp euro selloff tied to a sudden ECB pivot.