ECB to watch bank rates for signs of stress, Lagarde says

FRANKFURT (Reuters) - The European Central Bank's interest rate increases are just starting to take effect on the economy but their transmission may become stronger as a result of the banking turmoil, ECB President Christine Lagarde said on Wednesday.

Investors are pondering whether the ECB will be able to continue raising rates to fight high inflation despite turmoil in the banking sector that has seen two U.S. lenders go under and Swiss giant Credit Suisse need a last-minute rescue.

Lagarde said the ECB's actions to raise borrowing costs may be magnified if banks become more risk averse and start demanding higher rates when lending -- likely implying the central bank would need to increase its own rates by less.

"If, for example, banks start to apply a larger 'intermediation wedge' – meaning that at any level of the base rate they demand a higher compensation for the perceived risk they are taking on when lending – then pass-through will become stronger," Lagarde said.