In a speech delivered on February 21, 2025, at the European Parliament plenary debate on the ECB Annual Report, ECB President Christine Lagarde provided an update on the euro area’s economic situation and the European Central Bank’s monetary policy direction.
The address from Christine Lagarde emphasized a fragile economic recovery, notable progress in curbing inflation, and a cautious, data-driven approach to future policy adjustments as the ECB navigates an environment marked by considerable uncertainty.
Lagarde noted that the euro area economy grew modestly during the past year, achieving a sub-par 0.9% increase over 2023 despite a fairly stagnant fourth quarter.
Surveys reveal a somewhat mixed situation as well: manufacturing remains in contraction while services continue to expand.
This fairly uneven performance reflects persisting challenges such as high energy prices, regulatory burdens, and the delayed effects of prior monetary tightening.
Looking ahead, growth is now expected to linger above the 1% mark in 2025, with a moderate uptick projected around 2026 and 2027.
However, certain risks remain, such as potential global trade tensions (particularly following the different announcements from the Trump Administration), overall political instability in major euro area countries, and geopolitical pressures that could significantly disrupt energy markets.
Rising real wages and easing credit conditions offer some optimism, but the ECB remains wary of external shocks derailing this somewhat tentative recovery.
A key point made during the speech was the ECB’s “success” in advancing the so-called disinflation process.
Inflation is aligning with projections and is expected to stabilize sustainably at the ECB’s 2% medium-term target by late 2025.
Most measures of underlying inflation support this outlook, supported by recent rate cuts that have reduced borrowing costs.
Since June 2024, the ECB has lowered interest rates by 125 basis points, bringing the deposit facility rate—the primary tool for steering monetary policy—to 2.75%.
The latest 25-basis-point cut in Jan 2025 was reportedly informed by an updated assessment of inflation trends, underlying price pressures, and the effectiveness of policy transmission.
Despite persistent domestic inflation due to delayed wage and price adjustments, moderating wage growth offers some hope for further relief in services inflation.
Lagarde emphasized a “data-dependent and meeting-by-meeting” approach to future rate decisions, reflecting the relatively high uncertainty impacting the economic landscape.
The ECB’s move in Dec 2024 to ease monetary restrictions was accompanied by the completion of its balance sheet normalization, marked by the final repayment of targeted longer-term refinancing operations.
While financing conditions remain tight, the gradual loosening of policy aims to support demand without compromising inflation control.
The ECB remains committed to the 2% target, ready to adjust its toolkit if risks—such as trade fragmentation or fiscal policy shifts—materialize.
The speech from Lagarde has now reaffirmed the European Central Bank’s dedication to transparency and accountability, particularly through its dialogue with the European Parliament.
Lagarde welcomed the Parliament’s input on issues like inflation, the digital euro, and the ECB’s role in broader EU economic goals, noting that such exchanges strengthen its mandate.
This year marks around 10 years since the ECB started sharing detailed monetary policy meeting accounts, a practice encouraged by parliamentary calls for greater openness.