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ECB President Christine Lagarde told the European Parliament’s economic affairs committee that the euro area faces higher inflation from an energy shock, while growth has remained resilient. She explained the ECB’s recent 25-basis-point rate increase and said AI could affect productivity, investment, labour markets and inflation, though its overall economic effect is uncertain.
European Central Bank President Christine Lagarde told the European Parliament’s Committee on Economic and Monetary Affairs on 28 September that the euro area is facing higher inflation after an energy shock, while economic growth has remained resilient. She also explained the ECB’s recent 25-basis-point increase in its three key interest rates and said artificial intelligence could affect investment, jobs and inflation.
Lagarde said euro area real GDP grew solidly in the second quarter of 2026, with growth spread across most countries and sectors. She said that pattern was expected to continue in the third quarter. Manufacturing had performed solidly, supported by government spending on defence and infrastructure, while consumer confidence had rebounded from its spring lows. The ECB’s September staff projections put growth at 0.9% in 2026, 1.4% in 2027 and 1.5% in 2028.
Inflation rose in August: headline inflation reached 3.2%, up from 2.9% in July, while energy inflation increased to 14.3% from 10.3%. Lagarde said higher refining margins for liquid fuels and energy commodity prices contributed to the rise. Inflation excluding energy and food edged down to 2.4%, as services inflation fell. Compensation per employee grew 3.3% in the second quarter, down from 3.6% in the first; Lagarde said wages had not shown a material response to the energy shock.
The ECB raised its three key rates by 25 basis points earlier in September. Lagarde said the decision reflected the need to keep inflation on course to stabilise at the bank’s 2% medium-term target. She described the assessment as based on the inflation outlook, underlying inflation dynamics and how monetary policy affects borrowing costs and economic growth. At that point, she said the bank saw higher inflation ahead but no signs that the energy shock was becoming embedded in wages.
Rate Policy Meets Energy Inflation
The hearing matters because the ECB’s response to the energy shock affects borrowing costs across the euro area, while the inflation outlook remains above the bank’s 2% target. Lagarde said the bank would assess whether higher energy costs spread to other prices and wages, rather than react to energy prices alone. That distinction helps explain why the ECB chose a measured increase while saying it had not yet seen evidence of a wage response.
The figures also show the competing pressures facing policymakers. The September projections put average headline inflation at 3.0% in 2026 and 2.5% in 2027, before easing to 2.1% in 2028. Meanwhile, the ECB expects growth to strengthen gradually over the same period. Lagarde said uncertainty remained high, with risks of higher inflation and weaker growth.
AI adds a longer-term policy question. Lagarde said firms were expected to devote around 10% of total investment to AI in 2026, and AI-related borrowing accounted for roughly a quarter of credit growth to firms. She said AI could lift productivity and living standards, but could also change investment, labour markets and inflation. The speech’s opening remarks set out those channels as relevant to monetary policy; the overall macroeconomic effect, she said, remains uncertain.
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The ECB’s September Outlook
The hearing was part of the ECB president’s regular dialogue with the European Parliament’s economic affairs committee. Lagarde used it to review the euro area outlook, explain the bank’s latest policy decision and discuss AI’s economic effects. The speech was delivered in Brussels on 28 September 2026 and published by the Bank for International Settlements on 30 September.
In the September projections cited by Lagarde, average inflation excluding energy and food was forecast at 2.5% in 2026, 2.6% in 2027 and 2.3% in 2028. Longer-term inflation expectations remained around 2% in most measures, she said, while shorter-term expectations were still elevated. Unemployment stood at 6.4% in July, although employment and labour-force growth were slowing.
Lagarde said the ECB’s response to energy shocks is guided by whether higher prices risk feeding into broader inflation. She listed three parts of that assessment: the inflation outlook and its risks, underlying inflation dynamics including price and wage pass-through, and the effect of policy on borrowing costs and growth. She said long-term interest rates had risen notably since the ECB’s previous meeting, which would slow growth and reduce policy pass-through by more than the September projections had assumed.
“We do not react to energy prices, we react if we see risks of higher energy prices becoming embedded in inflation.”
— Christine Lagarde, ECB president
Risks to Growth and Inflation
Lagarde said the outlook remained subject to high uncertainty. The speech identified upside risks to inflation and downside risks to growth, but did not quantify their likelihood. It also said energy costs had not yet produced a material wage response; whether that changes remains an open question.
The future effect of AI is also unsettled. Lagarde described possible effects on productivity, investment, labour markets and inflation, but the available remarks do not establish the scale or timing of those effects. The speech’s supplied text ends as she begins to describe the channels through which AI may affect the economy, so further detail on those channels is not available here.
ECB Watches Price Pass-Through
The ECB will continue assessing the inflation outlook, underlying price and wage dynamics, and the transmission of its policy to borrowing costs and growth. Lagarde’s account did not specify a date or outcome for the next rate decision. The bank’s September projections provide the current baseline: inflation easing toward 2.1% in 2028 and growth rising to 1.5% that year.
Further information on AI’s economic effects will depend on how investment, borrowing, productivity and labour-market outcomes develop. Lagarde’s remarks set out why the ECB is monitoring those changes, but did not give a timetable or a numerical estimate of AI’s effect on inflation or growth.
Key Questions
What did Lagarde tell the European Parliament committee?
She discussed the euro area outlook, the ECB’s recent rate increase and possible effects of artificial intelligence on the economy and monetary policy.
Why did the ECB raise interest rates?
Lagarde said the ECB raised its three key rates by 25 basis points to keep inflation on track to stabilise at its 2% medium-term target amid higher energy costs.
What happened to euro area inflation in August?
Headline inflation increased to 3.2% from 2.9% in July. Energy inflation rose, while inflation excluding energy and food edged down to 2.4%.
What did Lagarde say about AI?
She said AI could affect productivity, investment, jobs and inflation. She cited expectations that firms would devote around 10% of total investment to AI in 2026, while saying the overall economic effect was uncertain.
What remains uncertain about the outlook?
The scale of the energy shock’s future effects on broader prices and wages remains unclear, as does the timing and size of AI’s effects on growth, jobs and inflation.
Source: primary
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