Christine Lagarde has told MEPs the ECB's room to keep fighting inflation with higher rates is close to spent. Appearing before Parliament on Monday, the ECB president described current rates as sitting at the upper limit of the neutral rate, the level that neither speeds up nor slows down the economy. Push higher, and the ECB starts to choke growth.
Two of her messages were familiar. Inflation is still largely confined to energy, with no sign of second-round effects: wages are not surging. And growth remains resilient, which she expects to continue through the third quarter. Those points back the ECB's record so far, having raised rates early and twice since June.
Two were new. She accepted that further hikes would hurt growth, and that the bond market sell-off will drag on activity too. She had avoided both topics at length at the press conference after the last rate decision a few weeks ago.
Tuesday's numbers arrived on cue. Spanish inflation came in at 5%, hotter than expected. France, Italy and Germany report this week, followed by the euro area, where the estimate is 3.7%. All of them sit well above the 2% target.
The energy backdrop has not improved. There is no sign of the Strait of Hormuz reopening, and European gas storage is at historic lows heading into the heating season.
Oil prices and government borrowing costs are locked in their tightest relationship since the first Gulf war in 1990, as the Middle East conflict increasingly sets the price of debt. The 10-year Bund yielded around 3.6% on Tuesday morning.
The gap between French and German borrowing costs is at levels last seen in 2012, during the euro crisis. Writing in the Frankfurter Allgemeine Zeitung, Niklas Záboji argued that France's debt problem has long had a European dimension, and that everyone in the ECB tower knows that if France wobbles, the eurozone wobbles. Budget season, which sometimes topples governments, and a run of elections over the next 12 months add to the strain.
The ECB is boxed in. The shock comes from energy, which rate rises cannot fix, while the bond market is already tightening financial conditions without any help from Frankfurt. Lagarde's admission that the neutral ceiling is near tells markets the next move is a harder trade-off between inflation and growth, not an easy one. Watch the euro-area flash estimate and the French spread: if both keep climbing, the ECB will face a choice between another hike into a slowdown and tolerating inflation above target.
