The European Central Bank left interest rates unchanged on Thursday, with President Christine Lagarde saying policymakers are “in a good place” despite inflation falling below target, stressing that the ECB “cannot be hostage to one data point” as it sticks to a data-dependent, meeting-by-meeting approach.
Bulgaria becomes 21st euro area member
The meeting opened with a symbolic gesture as the ECB welcomed Bulgaria to the euro area, effective 1 January 2026. Dimitar Radev, Governor of the Bulgarian National Bank, joined the ECB’s Governing Council with voting rights, marking the culmination of Bulgaria’s long path toward monetary union.
Lagarde praised the accession as further evidence of “the attractiveness of the single currency and the enduring benefits of European integration.”
Since 1999, euro area membership has nearly doubled, now encompassing 21 countries.
Inflation declines, but disinflation seen as temporary
Eurostat’s flash estimate showed eurozone inflation fell to 1.7% in January, from 2.0% in December and 2.1% in November. This drop was largely driven by a sharp fall in energy prices, which declined by 4.1% year-on-year.
Core inflation (excluding food and energy) eased to 2.2% — its lowest since October 2021 — while services inflation decelerated to 3.2%.
However, food inflation ticked up slightly to 2.7%. Lagarde downplayed fears of excessive disinflation, attributing much of the drop to base effects and emphasising that the headline figure does not alter the ECB’s medium-term inflation trajectory.
“We cannot be hostage to one data point,” she remarked.
Several questions probed whether the ECB’s language had turned more hawkish.
Lagarde refused the label, insisting that policy is “agile” rather than directional.
Economic growth supported by AI, infrastructure, defence
Eurozone GDP rose by 0.3% in the fourth quarter of 2025, driven mainly by services — particularly in information and communication technologies (ICT) and AI-related sectors.
In response to questions on artificial intelligence, Lagarde pushed back against the idea that Europe is falling decisively behind, pointing instead to rising private investment in AI-related activity.
She described ICT investment as “the big story” behind the resilience of domestic demand, stressing that it goes well beyond software alone and includes data centres, hardware and supporting infrastructure.
Crucially, Lagarde framed AI as a potential productivity dividend, not an inflation risk — at least for now.
Construction activity also gained momentum, bolstered by public investment in defence and infrastructure.
Labour market data showed a slight improvement, with unemployment edging down to 6.2% in December from 6.3%. While labour demand has cooled, the ECB sees no imminent signs of stress and continues to monitor wage trends closely.
Euro appreciation monitored, not targeted
In response to questions about the euro’s appreciation against the dollar, Lagarde stressed that the ECB does not target exchange rates, but considers their impact on inflation and growth.
“We always keep a close eye on exchange rate developments,” she said, adding that the euro’s recent strength has been “incorporated in our baseline.”
“There is no fatality or correlation between being a global currency and being appreciated relative to others,” she added.
She also revealed the ECB will send a “checklist” of reforms to EU leaders ahead of their competitiveness summit on 12 February, urging them to act on long-standing priorities.
This checklist outlines reforms – including completing the capital markets and banking unions, adopting the digital euro, deepening the single market, promoting strategic autonomy, and improving the EU’s institutional framework – the ECB sees as critical to boosting growth, productivity, and the euro’s international role.
“We strongly feel that significant reforms have to be either deepened or accelerated in order to deliver on what is the potential of Europe,” Lagarde concluded.
