The European Central Bank kept rates unchanged at two per cent on 9 February and President Christine Lagarde calls for calm. Meanwhile, French President Emmanuel Macron intends to discuss the euro’s appreciation against the dollar at this week’s informal meeting of the EU’s heads of government.
Mr Macron plans to raise the issue of exchange rates when European Union leaders meet next week to discuss improving the bloc’s ailing competitiveness. The rates are among issues relevant to boosting the economy and reducing vulnerabilities. The summit’s agenda already looks busy as the bloc attempts to complete its single market to gain more economic weight. With the US and China increasingly weaponising dependencies on arms and rare earths, member states also want to diversify from their largest trading partners.
The euro’s latest rally against the dollar has emerged as a key risk to the European Central Bank’s outlook. This trend has intensified by US President Donald Trump’s comments that he is not concerned. A strong euro creates a headwind for exporters, potentially curbing growth while also dragging down import costs. The ECB’s outlook envisages inflation dipping below two per cent this year and next.
Rates and resilience
EU policymakers have repeatedly urged the bloc to reduce its dollar dependency by increasing the euro’s international role. More transactions in euros are among the possible ways to avoid the fallout from currency turbulence. ECB President Christine Lagarde said last autumn that greater use of the euro in trade invoicing would reduce transaction costs for exporters and shield prices in the euro area from exchange rate volatility.
The ECB, however, kept interest rates unchanged on Monday, 9 February, with Ms Lagarde downplaying the recent euro rally. “(The economy) is in good shape because it is agile and it is ready to do what is necessary in order to reach our medium term two per cent targets in a symmetric way,” she said. The deposit rate was left unchanged as predicted by all economists in a survey. The ECB did not offer any further guidance on future steps. Incoming data will steer decision-making.
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Neither traders nor analysts see borrowing costs changing for the next two years. However, heightened uncertainty over inflation and growth has returned of late as Mr Trump again has wielded the threat of tariffs and a firmer euro weighs on prices. Ms Lagarde said officials discussed the common currency this week, reiterating that they do not target a particular exchange rate.
A volatile environment
Ms Lagarde described risks to the inflation outlook as broadly balanced even as she acknowledged that a stronger euro could bring inflation down beyond current expectations. The current range within which the euro relative to the dollar is evolving is very much in line with the overall average of that exchange rate between the euro and the dollar for as long as the euro has been around, she told reporters in Frankfurt.
“(The economy) is in good shape because it is agile and it is prepared to do what is necessary in order to reach our medium term two per cent targets in a symmetric way. — Christine Lagarde, ECB President
The euro area performed surprisingly well at the end of 2025 and should benefit from a spending splurge by Germany. A retreat in inflation below the ECB’s two-per-cent goal is seen as only temporary. Risks are mounting, however, and the foggier outlook on tariffs could curb investment. ECB Executive Board member Piero Cipollone cautioned last week that this could drag down growth.
Austrian central-bank chief Martin Kocher said that policymakers need full optionality to react quickly and decisively if needed. Ms Lagarde noted that while the region’s fiscal boost could fuel quicker-than-anticipated growth, challenges remain. The euro area continues to face a volatile global policy environment, she said.
Maintaining the baseline
Further frictions in international trade could disrupt supply chains, reduce exports and weaken consumption and investment, Ms Lagarde added. The euro’s appreciation, at one point beyond the critical $1.20 threshold, is another danger should it damp exports or make the undershoot in consumer prices more permanent. Inflation sank to 1.7 per cent in January from two per cent in December.
When I look at inflation, the overall situation remains balanced. — Peter Kazimir, member of ECB governing council
Bank of France chief Francois Villeroy de Galhau said ECB officials have a close eye on the common currency’s advance and its path will help guide decisions. Ms Lagarde maintained that the current monetary policy is in good shape. It’s in good shape because it is agile and it is prepared to do what is necessary in order to reach our medium term two per cent targets in a symmetric way, she said.
Governing Council member Peter Kazimir said the central bank should only alter interest rates if its outlook for the economy shifts significantly. It would take a major departure from our baseline scenario for me to consider recalibrating the policy setting, Mr Kazimir said on Monday. “When I look at inflation, the overall situation remains balanced,” the Slovak official said. His Lithuanian counterpart, Gediminas Simkus, said that the bank will continue on this path as forecast, barring shocks.
