Lagarde's comments reinforce the case for continued euro-area rate sensitivity, coming days after the ECB's second hike since the Iran war began pushing energy prices higher. With the deposit rate now at 2.5% and Bundesbank chief Joachim Nagel flagging the possibility of moving into mildly restrictive territory, markets are likely to keep pricing in a live risk of further tightening rather than an imminent pause. The euro could find some support on the hawkish framing, though the growth risk Lagarde herself acknowledged, alongside upgraded ECB growth forecasts, complicates a simple read on rate expectations. Her separate remarks on stretched AI valuations and circularity risk between AI firms add a layer of caution for risk assets broadly, even though she was careful to note that European banks are better capitalised to absorb a correction than in past cycles.---Lagarde says the inflation shock from the Iran war has further to run, while separately warning that sky-high AI valuations could be due a correction.Summary:ECB president Christine Lagarde told Ouest-France that the current inflation shock is longer lasting than policymakers had expected, citing continued conflict in the Middle East.The ECB raised rates this week for the second time since the Iran war drove energy prices higher, taking the deposit rate to 2.5%, a level chief economist Philip Lane has described as the top of the neutral range.Lagarde said energy costs have risen due to the Iran war and the loss of refining capacity, particularly in Russia, and that the ECB is obliged to respond given a resilient euro-area economy.Bundesbank president Joachim Nagel said borrowing costs may need to move into mildly restrictive territory to bring inflation, currently above 3%, back to the ECB's 2% target.New ECB projections lifted inflation forecasts for 2027 and 2028, with 2028 now expected slightly above target, alongside upgraded growth forecasts.Lagarde separately said AI sector valuations are very high and a correction is possible, citing circularity risk where AI companies invest in one another and then award each other supply contracts, though she said European banks are better capitalised than in the past.On France, Lagarde called for planned structural reforms, opposed proposals to cancel central bank held debt as financially dangerous, ruled out a presidential run, and confirmed she plans to leave the ECB next year without specifying whether she will serve her full term to October 2027.European Central Bank president Christine Lagarde said the current inflation shock facing the euro area will last longer than policymakers had anticipated, pointing to the ongoing conflict in the Middle East as the primary driver of continued price pressure."The current shock is longer lasting," Lagarde told regional newspaper Ouest-France in an interview published Saturday. She said the Iran war is continuing to disrupt energy markets, adding that volatility and pressure on energy prices are likely to persist even as higher costs raise the risk of slower growth.The remarks follow the ECB's decision this week to raise interest rates for the second time since the Iran war began driving oil and gas prices sharply higher, taking the deposit rate to 2.5%. Euro-area inflation currently sits above 3%, and officials expect further tightening may be required to bring price growth back toward the ECB's 2% target. Lagarde attributed the energy cost increase to both the Iran war and the destruction of refining capacity globally, singling out Russia, saying the combination has pushed prices higher across the board. She said the resilience of the euro-area economy means the central bank is obliged to keep responding.Bundesbank president Joachim Nagel said Friday that borrowing costs may need to move into mildly restrictive territory to bring inflation under control, a view that aligns with new ECB projections published Thursday showing faster inflation through 2027 and 2028, with the latter year now expected to sit slightly above target. Growth forecasts were also revised higher, reflecting the euro-area economy's resilience to both the Middle East conflict and separate headwinds from US trade policy.Lagarde used the interview to address stretched valuations in the artificial intelligence sector as well, saying current pricing is very high and that the wave of planned initial public offerings in the space is evidence of that. She flagged a circularity risk in which AI companies take stakes in one another and then award each other contracts for products such as microchips, and said a correction is entirely possible, though she declined to say when. She added that European banks hold AI related assets but are considerably stronger than in previous cycles.On domestic French politics, Lagarde called for planned structural reforms to be carried through and reiterated her opposition to proposals from the French far left to cancel government debt held by central banks, describing the idea as financially dangerous. She played down the prospect of entering France's presidential race, calling the suggestion "flattering" but unlikely, and ruled out a return to national politics after her ECB term, noting she will soon turn 71. Lagarde confirmed she intends to leave the ECB next year, without clarifying whether that means serving out her term through October 2027. This article was written by Eamonn Sheridan at investinglive.com.