ECB's Lagarde Warns Inflation Spreading Beyond Energy Markets

Lagarde acknowledged the positive development on that front. Washington and Tehran reached an agreement to end hostilities. She called the deal "good news," adding that restoring normal traffic through the Strait of Hormuz should help ease supply bottlenecks. "Geopolitical tensions globally appear to be easing," she said.

The peace deal does not undo the price pass-through that has already occurred. Oil has dropped roughly 4% since the agreement was announced. The ECB's concern is now focused on the lagged impact of months of elevated energy costs. The central bank will likely maintain a tight policy stance even as headline inflation falls, because the underlying spread of price increases has not yet peaked, Lagarde's remarks implied.

Markets reacted with modest moves. The euro edged higher against the dollar after her comments, then gave back some gains. EUR/USD traded near 1.0850, still below the 1.0900 level from earlier this month. Traders said Lagarde's tone reinforced the view that the rate-cutting cycle will start later than some had hoped.

The ECB's next scheduled policy meeting is June 6. Lagarde did not pre-commit to any specific action. The bank will have new staff inflation forecasts at that meeting. Those numbers will likely show upward revisions to the core projections, traders said.