By David Barwick – FRANKFURT (Econostream) – European Central Bank Chief Economist Philip Lane on Friday said euro area inflation was moving onto a more durable 2% footing and suggested interest rates were likely to remain broadly stable unless the outlook shifted materially.

In an interview with La Stampa conducted on Monday, Lane said headline inflation was already around 2% but that inflation excluding energy was still about 2.5%, while energy inflation was negative.

Over 2026, he said the ECB expected a transition toward a “more sustainable 2% inflation rate,” with services inflation and wage inflation easing, and pointed to the ECB’s December projections showing non-energy inflation around 2% through 2026, 2027 and 2028.

Asked about the main macroeconomic risk, Lane said the ECB’s risk assessment focused on identifying major risk factors rather than ranking them, and argued that the biggest risks to the euro area were “external,” including global growth, geopolitical tensions and trade policies.

The European economy had been weighed down in 2023-25 by the hit to real incomes from high inflation, the drag from high energy prices on firms’ costs and investment, and the lagged effects of the sharp rise in interest rates, he said.

Falling energy prices, greater fiscal support in Germany and the delayed effects of bringing the ECB’s deposit facility rate down from 4% in June 2024 to 2% in June 2025 should support a “stronger cyclical recovery” in 2026 and 2027,he said.

At the same time, he argued that Europe’s potential growth was low and said reforms recommended in reports by Mario Draghi and Enrico Letta were essential to raise the economy’s trend growth rate.

On the appropriateness of the current stance, Lane noted that “both the nominal interest rate and inflation are around 2%, so the inflation-adjusted real interest rate is close to zero and growth prospects are improving.”

“Under these circumstances, no one expects very large movements in interest rates,” he said. “The pros and cons of the current 2% rate versus slightly lower or slightly higher is a more ‘normal’ monetary policy debate. In our baseline we foresee, indeed, a remarkably stable situation.”

Still, uncertainty was high, which is why monetary authorities “emphasize that if we see developments that take us away from our baseline, we will adjust monetary policy as needed,” he said.

Asked when the ECB might raise rates again, Lane said that the baseline scenario as of December sees “inflation more or less at target for several years, growth close to potential and low and declining unemployment,” implying “no near term interest rate debate.”

“The current level of the interest rate delivers the baseline for the next several years,” he said. “But if we see developments in either direction, we will react.”

Many of the factors that could lead to below-target inflation in the medium term would be associated with an economic slowdown, he said. Developments to the upside “would typically involve an acceleration in the economy,” he said.

“But let me emphasize that in our baseline the economy is growing in the neighbourhood of potential growth,” he said. “So to be above the baseline we would have to see a significant acceleration in the economy.”

Another possibility would be a disruption akin to 2021-22 that created bottlenecks and supply-chain stress, which he described as “more of a nightmarish scenario.”

On trade tensions and tariffs, Lane said it was “only January” and that effective US tariffs had turned out lower than feared after exemptions and reversals, though he said the initial move was a damaging shock for some European firms.

He highlighted exchange rate dynamics as a key channel, saying the euro appreciated from around USD 1.08 last March to as high as USD 1.18 in June before stabilizing around USD 1.16-USD 1.18, an appreciation he called disinflationary for the euro area.

If fragmentation became structural, Lane said the ECB would likely face greater volatility and would need to distinguish transitory shocks from those with persistent effects, noting that trade disruptions can hit both demand and supply and could alter the inflation outlook in either direction.

On the Federal Reserve, Lane said the best outcome for the global economy was for each central bank to “do its job,” adding that the ECB was not “a dollarized continent” and that European fundamentals were decisive for euro area policy.

Fed decisions still mattered via long-term rates, global financial conditions and exchange rates, he said, warning that the euro area would face complications if US inflation failed to return to target, if spillovers lifted the term premium, or if a reassessment of the dollar’s future role triggered a financial shock.

Lane also defended central bank independence, saying decades of evidence showed policy worked best on an independent, technocratic basis under a clear legal mandate.

Turning to US equity markets, Lane said valuations reflected optimism about artificial intelligence and outlined a benign correction in which investors reprice winners and losers with limited economic impact, versus a worse outcome in which AI disappoints and a market correction coincides with a sharp pullback in investment.

On China, Lane said Europe had seen lower import prices that were feeding through into competitive pricing pressures, and argued that a better-balanced global economy would pair China’s expanding productive capacity with stronger domestic demand and greater access to the Chinese market.

On Europe’s competitiveness, the issue was better framed as one of “dynamism,” he said, arguing that Europe lacked sufficient scale in technology and faced tougher competition as China moved up the value chain.

Looking ahead to 2026, Lane cited strengthening the Single Market, completing the savings and investments union and advancing the digital euro as core priorities, calling the digital euro an increasingly important part of Europe’s monetary autonomy.