MediumIV Macro Policy & Sovereign Debt28 September 2026, Monday
Lagarde says rising long-term rates will slow eurozone growth
ECB President Lagarde told the European Parliament on 28 September that there is no evidence the energy shock has passed through to wages, so a measured response remains appropriate. Germany's 10-year yield stands at 3.63%, its highest level since June 2009.
According to Econostream, Lagarde spoke to the European Parliament's Committee on Economic and Monetary Affairs on Monday 28 September. On 10 September the ECB raised its three policy rates by 25 basis points, lifting the deposit rate to 2.50% from 16 September. Lagarde said the inflation outlook for 2027 and 2028 will be higher than expected, mainly because of energy. However, she noted that compensation per employee slowed from 3.6% to 3.3% in the second quarter and said she saw no evidence of energy prices passing through to wages. According to Lagarde, long-term rates, which have risen markedly since September, will slow growth and price pass-through more than the September projections foresaw.
According to a Reuters report on Investing.com, eurozone inflation has exceeded 3% and could approach 4% by year-end. On top of the 2 hikes over the summer, markets are pricing up to 4 more next year. Trading Economics writes that money markets are pricing about 100 basis points of hikes by the end of 2027. According to Reuters, Lagarde said government subsidies have reached about 0.1% of eurozone GDP and could suppress inflation in the near term while prolonging it. The ECB's September projections put inflation at 3.0% for 2026, 2.5% for 2027 and 2.1% for 2028. According to Trading Economics, Germany's 10-year yield stood at 3.63% the same day, its highest level since June 2009.
Talay assessment
Bottom line
Lagarde indirectly pushed back against aggressive market pricing of hikes, saying rising extended-maturity rates have already done part of the tightening. This suggests the ECB sees the rise in bond yields not as a problem but as a tool that is partly doing its job. Still, her acknowledgement that the inflation projection will be revised up keeps a hike at the next meeting in play.
Likely effects
- Eurozone bondsNegativeWeeks
The ECB's lack of objection to the rise in extended-maturity rates leaves room for German and French yields to stay high.
- EuroUncertainWeeks
Pushing back against market pricing could weigh modestly on the euro against the dollar.
- Turkish exportsNegative1–6 months
If extended-maturity rates slow eurozone growth, demand could weaken in Türkiye's largest export market.
Possibilities, ranked
- 1Measured hiking path55%
The ECB stays data-dependent and follows a slower hiking path than markets are pricing.
Watch: Eurozone flash inflation data for September
- 2Faster tightening30%
September inflation exceeds expectations and wages accelerate, prompting the ECB to raise the pace of hikes.
Watch: September inflation and wage indicators
- 3Pause15%
Extended-maturity rates are seen slowing growth sharply, and the ECB moves to wait and see.
Watch: October PMI data
Probabilities are calibrated judgement based on the sources, not measurement, and are revised as new information arrives. Not investment advice.
Market reaction
Indicators affected
- ECB deposit rate▲ 2.50%
- Germany 10Y, 28 September▲ 3.63%