ECB's Lane expects euro area growth to strengthen, rates stable

Philip R. Lane, Member of the Executive Board of the European Central Bank, expects a stronger cyclical recovery in the euro area economy in 2026 and 2027. He indicated that interest rates are currently appropriate at 2 percent, with no large movements anticipated in the baseline scenario.

Inflation's path to two percent

Philip R. Lane stated that the European Central Bank's forceful monetary policy tightening successfully brought inflation back towards its 2 percent target.

While headline inflation is currently around 2 percent, core inflation, excluding energy, remains at 2.5 percent.

The ECB expects a transition this year towards a more sustainable 2 percent inflation rate, with services and wage inflation moderating.

The December projections foresee non-energy inflation around 2 percent through 2026-2028, with minor deviations for headline inflation.

Lane noted that the deposit facility rate rose from -0.5 percent pre-pandemic to 4 percent by June 2024, before declining to 2 percent by June 2025.

With nominal interest rates and inflation both around 2 percent, the real interest rate is near zero, and growth prospects are improving.

He indicated that no large movements in interest rates are expected in this "remarkably stable" baseline situation.

External headwinds, internal reforms

Lane identified external factors as the main macroeconomic risks for the euro area, including global economic growth, geopolitical tensions, and global trade policies.

He acknowledged a difficult 2023-2025 period for the European economy due to high inflation, energy prices, and rising interest rates.

However, he anticipates a stronger cyclical recovery in 2026 and 2027, supported by declining energy prices, increased fiscal support in Germany, and the lagged effects of past interest rate reductions.

Despite this, Lane highlighted Europe's low potential growth rate as a structural issue, emphasizing the urgent need for reforms recommended in the Draghi and Letta reports to improve competitiveness and dynamism.

Stability in rates, urgency in reforms

Lane's interview paints a picture of monetary policy returning to a "normal" debate, with the ECB confident in its inflation trajectory and the current rate level.

This stability, however, masks persistent structural challenges for the euro area, particularly its low potential growth and competitiveness issues.

The emphasis on accelerating reforms underscores that fundamental economic dynamism requires political action beyond monetary policy.