Euro zone inflation risk quite contained, Lagarde says

HELSINKI (Reuters) -The euro zone economy is handling U.S. tariffs better than earlier expected, leaving inflation risks "quite contained," European Central Bank President Christine Lagarde said on Tuesday.

The ECB has kept interest rates steady since June and signalled that it was in no hurry to adjust policy further as the economy was holding up and inflation was now firmly around its 2% target.

Financial investors have largely priced out any further rate cut and most policymakers argue that December is the earliest time for any real discussion on whether to provide the economy more support.

"As we can model the future, the risks to inflation appear quite contained in both directions," Lagarde said in Helsinki. "With policy rates now at 2%, we are well placed to respond if the risks to inflation shift, or if new shocks emerge that threaten our target."

She argued that trade shocks are not creating new inflationary pressures, so the ECB was not confronted with the classic policy trade-off of having to deal with a period of stalling growth and rising inflation.

ECB staff anticipated a bigger hit from trade tensions but actual outcomes were more benign as there were no supply chain disruptions, governments stepped up their own spending to boost growth, there was no retaliation by the EU, and the euro rose in value despite expectations for weakening.

"This reflects the fact that the imposition of U.S. tariffs coincided with a broader re-evaluation of the country's position in the global financial system," Lagarde argued. "Investors began to question whether the U.S. dollar would continue to warrant its status as the ultimate safe-haven currency."

Uncertainty did weigh on growth but not as much as thought because the eventual trade deal propped up confidence quicker than expected.

Lagarde also pointed to government decisions to spend more on defence as a key factor for a relatively benign outcome.

"Government investment is now expected to add 0.25 percentage points to growth between 2025 and 2027, offsetting around one-third of the trade shock," Lagarde said.

(Reporting by Anne Kauranen; writing by Balazs Koranyi, Editing by William Maclean)