Diagnostic challenges for ECB monetary policy in 2026

Philip R. Lane, Member of the Executive Board of the ECB, delivered a keynote speech at the 2026 ECB Conference on Monetary Policy: bridging science and practice.

He outlined the diagnostic challenges in determining the appropriate ECB monetary policy, focusing on three criteria: assessment of inflation outlook and risks, underlying inflation dynamics, and the strength of monetary transmission.

The medium-term inflation outlook is central to policy decisions and is based on an integrated, data-dependent assessment of multiple shocks, notably energy supply shocks, and other factors such as fiscal, AI, and financial conditions.

Assessing risks involves analyzing economic and financial risks that could generate upside or downside shocks, with scenarios published to guide understanding of energy price paths and macroeconomic impacts. The ECB monitors financial conditions using indices like the ECB Macro-Finance Financial Conditions Index and the ECB-BIG index.

Recent data show September inflation at 3.8%, driven mainly by energy inflation of 18.8%. Non-energy inflation remains contained, with some components like food declining, and others like goods rising. Projections indicate non-energy inflation will rise to 2.6% in 2027 before falling back to 2.3% in 2028, influenced by lagged energy pass-through and other factors.

Diagnostic challenges include differentiating near-term volatility from medium-term shifts, particularly regarding energy shocks and their indirect effects on activity and inflation. Additional influences include fiscal policy, AI, and financial conditions, which interact complexly with energy shocks.

The energy supply shock, exacerbated by geopolitical tensions, can reduce activity and inflation through demand destruction and terms of trade deterioration. Recent economic momentum has been better than expected, but risks from a second wave of energy shocks remain, requiring close monitoring.

Fiscal policy has provided stimulus in 2026, with expected tightening in 2027-2028, which will slow growth. AI is boosting the economy through digital investment and exports, but its macroeconomic impact remains limited due to its scale relative to global AI trends and its effect on long-term interest rates.

Credit dynamics show corporate borrowing remaining aligned with GDP, supported by cyclical and structural factors like energy costs and AI investment. Household credit growth remains subdued, constrained by costs and confidence.

Lane emphasized that the energy price surge is a second wave, requiring a comprehensive, multi-faceted diagnostic approach. The ECB’s monetary policy remains on the ‘middle path,’ with rate decisions based on ongoing data analysis and unfolding shocks, avoiding pre-commitments.