European Central Bank President Christine Lagarde has indicated that the central bank currently sees no need to implement a more forceful policy response despite the impact of the Middle East conflict, as inflation is still expected to return to its target over the medium term.

Speaking to European Parliament lawmakers in Brussels, Lagarde stated that household consumers do not believe the current elevated inflation levels will persist. She noted this reinforces the ECB's confidence that, with appropriate monetary policy measures, inflation will decline from its current level above 3% to the 2% target.

Lagarde said on Monday, "We are not seeing at the moment de-anchoring of inflation expectations or a second round effect that would lead us to believe that we have a stronger response at this point in time."

Investors are assessing whether the ECB will tighten policy further following its first interest rate hike since 2023. Several officials have warned that inflationary pressures are no longer confined to the energy sector but are spreading more broadly across the economy. Despite progress between the US and Iran towards a lasting peace, markets still anticipate the ECB will implement at least one more 25-basis-point rate hike this year, which would bring the deposit rate to 2.5%.

Following Lagarde's remarks, traders scaled back their bets on further rate increases. Money markets now price in a cumulative 33 basis points of tightening by year-end, compared with 37 basis points before her speech. German government bonds advanced, pushing the yield on two-year German bonds down 6 basis points to 2.59%.

Lagarde welcomed the agreement reached in the Middle East last week but emphasized that the situation remains fragile. She stated that the ECB must maintain flexibility in its response.

Lagarde said, "By deciding on a meeting-by-meeting basis and sticking to data dependence, rather than pre-committing to a particular rate path, we can adapt our policy response as the shock evolves and ensure that it remains proportionate."