ECB sees inflation stabilising as euro area enters transition phase

Inflation in the euro area has largely been brought back under control after one of the most severe price shocks in recent history, with the European Central Bank now entering a crucial transition phase, according to ECB executive board member Philip Lane.

In an interview first published by Italian daily La Stampa, Lane said the sharp inflation surge of 2021 and 2022 prompted a forceful tightening of monetary policy that has proved effective, with headline inflation now close to the ECB’s 2 per cent target.

Moreover, Lane explained that while overall inflation is around 2 per cent, underlying pressures remain uneven, with inflation excluding energy still close to 2.5 per cent and energy prices in negative territory, underscoring the complexity of the current phase.

He said the ECB expects inflation to move towards a more sustainable 2 per cent rate over the course of this year, supported by easing services inflation and slower wage growth, adding that December projections point to non-energy inflation hovering around 2 per cent through 2026, 2027 and 2028.

Looking ahead to risks in 2026, Lane said the ECB does not rank threats in a simple hierarchy but continuously assesses a broad range of factors, with the most significant risks largely external, including global growth, geopolitical tensions and trade policy developments.

He acknowledged concerns over weak euro area growth but said recent years had been shaped by high inflation eroding household incomes, elevated energy costs weighing on firms and sharply higher interest rates dampening investment, even as unemployment remained low.

Lane said a turning point is now under way, citing lower energy prices, stronger fiscal support in Germany and the cumulative impact of interest rate cuts, which saw the ECB’s deposit rate fall from 4 per cent in June 2024 to 2 per cent in June 2025.

He said these changes should support a cyclical recovery in 2026 and 2027, although Europe’s low potential growth remains a structural challenge requiring urgent reforms, including those outlined in reports by Mario Draghi and Enrico Letta.

On monetary policy, Lane said the current rate setting is broadly appropriate, with nominal interest rates and inflation both around 2 per cent, leaving real rates close to zero, and added that large rate moves are not expected unless conditions diverge sharply from the baseline.

He stressed that rate increases would only be considered in the event of a significant economic acceleration or major global disruption, while renewed weakness would instead raise concerns about inflation undershooting the target.

Lane also addressed global trade fragmentation, saying US-EU tariffs had been less damaging than initially feared and were partly offset by strong US demand and a weaker dollar, which allowed the euro to appreciate and exert a disinflationary effect.

On central bank independence, he warned that political pressure undermines price stability, arguing that decades of evidence show independent monetary policy delivers better outcomes.

Looking to 2026, Lane identified three priorities for the euro area: strengthening the Single Market, completing the savings and investments union, and advancing the digital euro as a pillar of Europe’s monetary autonomy.