FRANKFURT, Feb 6 (Reuters) – European Central Bank policy is right for the current inflation outlook but risks remain that price growth might weaken excessively and the ECB must be ready to act if these materialise, ECB policymakers said on Friday.
The euro zone’s central bank kept interest rates unchanged on Thursday, saying the outlook remained broadly unchanged and that policymakers still saw inflation returning to its 2% target in the medium term after a well-telegraphed dip this year.
“We are on target,” Spanish central bank chief Jose Luis Escriva told Cadena Ser radio station.
STEADY POLICY BEST COURSE
“We see that inflation expectations are anchored … (and) everything points to the best course of action at this time being to maintain stable interest rates,” Escriva said.
A fresh ECB survey published on Friday saw inflation rising back to 2.0% next year after edging under the target in 2026, partly because economic growth will accelerate to remain broadly around the bloc’s potential.
That is also why financial markets see just a one-in-five chance that the ECB will cut interest rates again, with most betting that the benchmark deposit rate will stay at its current 2% all year.
RISK OF TOO-LOW INFLATION REMAINS
But a clutch of policymakers warned on Friday that the picture for inflation, the ECB’s main focus, could cloud.
“There is a real risk of lower-than-expected inflation,” Finnish central bank governor Olli Rehn said in a blog post. “A modest sign of this was already seen in the January data.”
He argued that slowing wage growth, a rise in cheap Chinese imports and a strong euro versus the dollar were putting downward pressure on prices.
French central bank chief Francois Villeroy de Galhau meanwhile argued there were significant downside risks for inflation.
“We do not have an exchange-rate target,” Villeroy told BFM Business radio. “If the euro were to appreciate significantly further, that would mean less inflation.”
“We are keeping a very close eye on exchange rate developments. I think that’s perhaps an important signal,” he said.
Inflation in the 21-country euro zone dipped to 1.7% in January and could fall lower in coming months, bringing back memories of the pre-COVID decade during which the bank struggled and failed to lift price growth back to 2%.
The euro surged against the dollar in early 2025 and has been hovering at a relatively high level ever since.
While this strength is now incorporated into the ECB’s own projections, it was not fully clear how much it would be transmitted into prices.
A strong euro lowers the price of imported goods, especially key energy products which are predominantly priced in dollars.
ECB President Christine Lagarde said on Thursday the ECB was keeping a “close eye” on exchange rate developments.
Latvian central bank governor Martins Kazaks also pointed to the exchange rate as a potential risk factor.
“A sizeable and pacey euro strengthening would lower inflation outlook via weakening competitiveness and economic activity, thereby potentially triggering a policy response,” he said in an opinion piece.
But he added that monetary policy remained in a good place and said action was needed elsewhere to boost the euro zone’s growth potential.
(Reporting by Balazs Koranyi, Francesco Canepa, Leigh Thomas, Anna Ringstrom and Jesus Aguado; Editing by Catherine Evans)
Comments