ECB: Lagarde defends rate hikes before the IMF and urges Brussels on digital euro

Toothpaste and a tube. Former Bundesbank chief Karl Otto Pöhl compared inflation to toothpaste. You never really get it all back in the tube. On Saturday, in front of the International Monetary Fund, the ECB president made it clear that she intends to keep the cap tightly screwed on.

Christine Lagarde's ECB has raised rates twice since June and promises no pause. Euro crypto buyers will also be watching for the digital euro. Lagarde sets a deadline for lawmakers less than a month after the launch of the Pontes platform.

Key Points

• The ECB's deposit rate rose to 2.50% on September 16, after two quarter-point increases.
• The president refuses to ignore the energy surge but promises a "measured" response.
• An internal pilot is planned for the second half of 2027, provided that a regulation is voted on before January.
• Private credit funds and cutting-edge AI are now on the list of monitored threats.

ECB considers energy shock too significant to ignore

Eurozone inflation surged to 3.8% in September, driven by energy and, to a lesser extent, by food and services. The underlying index, which excludes the most volatile prices, rose to 2.5%. The Middle East is doing the rest.

Central bankers have a well-rehearsed reflex in the face of an oil shock. They "look through" it, meaning they wait for prices to come down on their own. In her statement to the IMF on October 17, Lagarde explicitly rules out this option. The shock is deemed too significant to ignore, but a "measured" response remains appropriate to contain inflation. As a result, two increases of 25 basis points, in June and then in September.

The ECB is not hitting harder because it sees "no signs at this stage" of significant contagion from energy to other prices and wages. Another phrase should be of more interest to your portfolios. Financing conditions have tightened and long-term rates have "significantly" risen since the last meeting. This could slow growth more than expected. The bond market is already doing part of the work in place of Frankfurt.

You’ve seen this movie before. In 2022, the Fed and the ECB were tightening aggressively. Bitcoin lost nearly two-thirds of its value over the year. The context is different, with expected growth of 0.9% in 2026 and then 1.4% in 2027 according to September projections. But liquidity remains the preferred fuel for risky assets.

Digital euro hanging on the European lawmakers' schedule

Change of scenery. The Eurosystem is preparing a digital euro for everyday payments, presented as the digital equivalent of banknotes. The roadmap is unambiguous with a twelve-month internal pilot in the second half of 2027, under one explicit condition. The regulation establishing the digital euro must be adopted by the end of 2026. The ECB president speaks of a "crucial" point.

The European Parliament and member states thus have just over two months to finalize the text. The Commission put it on the table in June 2023. More than three years of back and forth.

The vocabulary has also changed. Lagarde speaks of "coexistence" between public and private solutions, serving the "strategic autonomy" of Europe in payments. Visa, Mastercard, and dollar stablecoins are targeted without being named. G7 ministers carefully avoided the topic this week.

Wholesale finance is moving faster. Pontes has allowed since September 21 to settle central bank money transactions on distributed ledgers, these shared databases that power blockchain. The Appia initiative will then outline the architecture of a tokenized European ecosystem with common standards and governance. And EUREP is attracting interest beyond the eurozone. More than 30 foreign central banks have expressed interest in this Eurosystem repo facility in six months.

Private credit and AI in Frankfurt's sights

Lagarde considers the risks to financial stability to be "high." She places the accelerated adoption of artificial intelligence among the causes for concern, alongside geopolitical tensions and public finances. New cutting-edge AI models have increased cyber risks. Worse, the concentration of critical third-party providers creates single points of failure for banks as well as the rest of the economy.

Private credit remains under pressure. These funds that lend directly to companies without going through a bank have faced outflows and reactivated their redemption barriers. These locks block withdrawals when everyone wants to leave at the same time. Celsius customers, frozen in June 2022, know the scene by heart.

The institution, however, downplays it. Financial actors in the eurozone are little exposed directly, so private credit, "in isolation," is unlikely to shake the system. Banks, on the other hand, show solid capital and liquidity buffers. The ECB is particularly concerned about contagions between non-bank actors, especially when their bets concentrate on AI.

The Governing Council will make its next rate decision on October 29. Its last meeting of the year falls on December 16 and 17, two weeks before the deadline set for lawmakers for the digital euro. On the French side, the end-of-year crypto calendar is already packed with the flat tax and DAC8.

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