ECB Enters New Phase as Euro Area Inflation Nears Target, Says Lane

Inflation across the euro area has largely been reined in following one of the most intense price surges in recent decades, with the European Central Bank now moving into what it sees as a delicate transition period, according to ECB executive board member Philip Lane.

In an interview first published by Italian newspaper La Stampa, Lane said the dramatic rise in inflation during 2021 and 2022 led the ECB to implement an aggressive tightening of monetary policy, a strategy that has since delivered results. Headline inflation, he noted, is now close to the ECB’s 2 per cent objective.

Lane cautioned, however, that the inflation picture remains uneven beneath the surface. While overall inflation is hovering around 2 per cent, inflation excluding energy remains closer to 2.5 per cent, while energy prices are currently in negative territory. This divergence, he said, highlights the complexity of the phase the ECB is navigating.

He added that the central bank expects inflation to converge toward a more durable 2 per cent rate over the course of this year. This adjustment is expected to be supported by a moderation in services inflation and slower wage growth. Lane pointed out that the ECB’s December projections show non-energy inflation staying around 2 per cent through 2026, 2027 and 2028.

Discussing risks beyond the near term, Lane said that looking ahead to 2026, the ECB does not prioritize threats in a rigid ranking but instead continually evaluates a wide set of variables. The most consequential risks, he said, are largely external, including developments in global economic growth, geopolitical tensions and shifts in trade policy.

Lane acknowledged ongoing concerns about sluggish growth in the euro area, but said recent economic performance must be viewed in context. High inflation in recent years eroded household purchasing power, elevated energy costs pressured businesses, and sharply higher interest rates curtailed investment, even as unemployment remained at historically low levels.

According to Lane, the euro area is now approaching a turning point. He cited falling energy prices, stronger fiscal support measures in Germany and the cumulative effect of interest rate cuts as key drivers. These cuts have reduced the ECB’s deposit rate from 4 per cent in June 2024 to 2 per cent in June 2025.

He said these developments should help underpin a cyclical recovery in 2026 and 2027. At the same time, Lane warned that Europe’s weak potential growth remains a deep-rooted structural issue that demands urgent reform. He referenced recommendations contained in reports by Mario Draghi and Enrico Letta as part of the solution.

On the outlook for monetary policy, Lane said the current stance is broadly appropriate. With both nominal interest rates and inflation close to 2 per cent, real interest rates are near zero. As a result, he said, significant changes to policy are unlikely unless economic conditions diverge sharply from the ECB’s baseline scenario.

He emphasized that rate hikes would only be contemplated in the event of a strong economic acceleration or a major global shock. Conversely, a renewed economic slowdown would raise the risk of inflation falling below the ECB’s target.

Lane also commented on global trade fragmentation, noting that US-EU tariffs have so far been less harmful than initially anticipated. He said their impact has been partly offset by robust demand in the United States and a weaker dollar, which allowed the euro to strengthen and exert a disinflationary influence.

Addressing the issue of central bank independence, Lane warned that political interference poses a threat to price stability. He argued that decades of experience show that independent central banks consistently deliver better economic outcomes.

Looking ahead to 2026, Lane outlined three key priorities for the euro area: deepening the Single Market, completing the savings and investments union, and pushing forward with the digital euro as a cornerstone of Europe’s monetary autonomy.

By fLEXI tEAM