Finance
ECB on a steady rate path for now but Fed tussle a risk, chief economist warns
Published by Global Banking and Finance Review
Posted on January 16, 2026
ECB Maintains Current Rate Stance Amid Fed Policy Uncertainties
ECB's Current Rate Policy and Economic Outlook
FRANKFURT, Jan 16 (Reuters) - The European Central Bank will not debate any rate change in the near term if the economy stays on course, but new shocks, like a potential deviation by the Federal Reserve from its mandate, could upset the outlook, ECB chief economist Philip Lane said.
Impact of U.S. Federal Reserve on Euro Zone
The ECB has kept rates on hold since ending a rapid rate cut cycle in June and signalled last month that it was in no hurry to change policy again since economic growth is surprisingly strong and inflation seems to have settled around the 2% target for the next several years.
Inflation and Employment Considerations
A potential risk to this rather benign outlook is U.S. President Donald Trump's continued efforts to exert greater control over interest rates and push down borrowing costs much quicker than the Fed considers appropriate given lingering price pressures.
Market Reactions and Future Projections
"It would be economically difficult for us if inflation in the U.S. did not return to target, or if financial conditions in the United States spilled over to a rising term premium," Lane told Italian newspaper La Stampa in an interview published on Friday.
"A reassessment of the future role of the dollar, could also constitute a kind of financial shock to the euro," Lane said. "So there are scenarios where, if the Federal Reserve departed from its mandate, that would create a problem."
Unlike most central banks, which focus primarily on inflation, the Fed has an unusual dual mandate of promoting maximum employment and stable prices, deemed to be an inflation rate of 2%.
The euro firmed sharply against the dollar last year as investors pulled out of dollar assets on policy uncertainty, weakening European export competitiveness at a time when cheap Chinese goods are already pricing European products out of key markets.
Still, Lane expressed confidence in Fed policy and said the euro zone was likely to see a sustained stabilisation of inflation at 2%, as seen by its December projections.
"In these circumstances, there is no near-term interest rate debate," Lane said, batting back a question about a potential rate hike. "The current level of the interest rate delivers the baseline for the next several years.
"But if we see developments in either direction, we will react," he said.
Markets for a brief period at the turn of the year saw the possibility of a rate hike in late 2026 but now see the deposit rate holding steady at 2% this year.
Lane argued that the 21-nation euro zone is likely to see a stronger cyclical recovery this year and next but potential growth itself was low and deeper structural changes were needed to kick it into higher gear.
(Reporting by Balazs Koranyi; Editing by Nia Williams)
Frequently Asked Questions about ECB on a steady rate path for now but Fed tussle a risk, chief economist warns
1What is the European Central Bank?
The European Central Bank (ECB) is the central bank for the euro and is responsible for monetary policy within the Eurozone, aiming to maintain price stability.
2What is inflation?
Inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power.
3What is monetary policy?
Monetary policy refers to the actions taken by a central bank to manage the money supply and interest rates to achieve macroeconomic objectives.
4What is economic growth?
Economic growth is the increase in the production of goods and services in an economy over a specific period, typically measured by GDP.
5What is a central bank's mandate?
A central bank's mandate typically includes managing inflation, stabilizing the currency, and overseeing the banking system to ensure financial stability.
