Inflation in the euro area has largely been brought back under control, marking a significant transition phase for the European Central Bank (ECB), as noted by ECB executive board member Philip Lane. In a recent interview with Italian daily La Stampa, Lane discussed the ECB’s approach following one of the most severe price shocks in recent history, particularly during the sharp inflation surge of 2021 and 2022.
Lane explained that the ECB’s forceful tightening of monetary policy has proven effective, with headline inflation now approaching the ECB’s target of 2 per cent. Despite this promising development, he highlighted that underlying inflation pressures remain uneven. Inflation excluding energy stands at around 2.5 per cent, while energy prices have dropped significantly, illustrating the complexities of the current economic landscape.
Looking ahead, Lane expressed optimism that inflation will gravitate towards a more sustainable 2 per cent rate throughout this year, aided by easing services inflation and slower wage growth. According to December projections, non-energy inflation is expected to stabilise around 2 per cent through the years 2026, 2027, and 2028.
While discussing potential risks in 2026, Lane noted that the ECB continuously assesses a broad range of factors rather than ranking threats in a simple hierarchy. He pointed out that significant risks are largely external, encompassing global growth, geopolitical tensions, and developments in trade policy.
Lane acknowledged concerns surrounding weak growth within the euro area, attributing this to high inflation eroding household incomes, elevated energy costs affecting firms, and sharply higher interest rates dampening investment, despite low unemployment rates.
He indicated that a turning point is underway, citing lower energy prices, robust fiscal support in Germany, and the cumulative effects of interest rate cuts. These factors, which have seen the ECB’s deposit rate drop from 4 per cent in June 2024 to 2 per cent in June 2025, are expected to support a cyclical recovery in 2026 and 2027. However, he emphasised that Europe’s low potential growth presents a structural challenge that requires urgent reforms, including those proposed in reports by Mario Draghi and Enrico Letta.
On the topic of monetary policy, Lane affirmed that the current interest rate setting is broadly appropriate, with nominal interest rates and inflation both around 2 per cent, resulting in real rates being close to zero. He clarified that significant rate increases are not anticipated unless there is a sharp divergence from the baseline conditions.
Lane further stressed that any rate hikes would only be contemplated in the event of a significant economic acceleration or major global disruption. Conversely, renewed economic weakness could raise concerns about inflation falling below the target.
Addressing global trade fragmentation, he observed that US-EU tariffs have not been as damaging as initially feared, largely offset by strong US demand and a weaker dollar, which has allowed the euro to appreciate and exert a disinflationary effect.
Lane also touched upon the importance of central bank independence, cautioning that political pressure can undermine price stability. He cited decades of evidence indicating that independent monetary policy yields better economic outcomes.
As the ECB looks towards 2026, Lane identified three key priorities for the euro area: strengthening the Single Market, completing the savings and investments union, and advancing the digital euro as a cornerstone of Europe’s monetary autonomy.
