(Bloomberg) -- Financial stability in the euro area is at risk from an economic slowdown and inflation that’s spreading to more and more sectors, European Central Bank President Christine Lagarde said. 

“Weaker economic growth, higher inflation and tighter financing conditions put pressure on the debt servicing capacity of companies and households,” Lagarde said in a statement at the meeting of the International Monetary Fund in Washington.

“Despite recent adjustments, financial markets still appear to be pricing in outcomes that could turn out to be too optimistic,” she said.

Lagarde also warned that officials were seeing “early signs of an increase in credit risk, which warrants careful monitoring.”

Economists increasingly expect the euro area to fall into recession as consumers face double-digit inflation and firms contend with surging input costs. Lagarde reiterated that risks to growth “are primarily on the downside, particularly because of the economic consequences of the war in Ukraine.”

Lagarde also said: 

• “The ECB’s Governing Council expects to raise interest rates further over the next several meetings, based on a data-dependent and meeting-by-meeting approach”
• “Price pressures are spreading across more and more sectors, partly owing to the impact of high energy costs and supply bottlenecks, but also because of recovering demand in the services sector”
• “With monetary policy normalizing, the focus of fiscal policy will need to shift progressively toward measures that preserve debt sustainability without endangering the recovery in the medium term”

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