Assessing Inflation: When Is It Too Low for the Euro Area?

Amid ongoing discussions about the stability and future of the euro area, recent insights highlight the careful considerations facing central bankers regarding inflation targets and monetary policy adjustments.

The euro area’s primary monetary policy objective remains firmly centered on maintaining price stability, with the European Central Bank (ECB) defining this as a symmetric 2% inflation target over the medium term. This means that both significant overshoots and undershoots of this target are viewed as equally undesirable. Dr. Joachim Nagel, President of the Deutsche Bundesbank, emphasized that monetary policy's effect on inflation, much like adjusting underfloor heating in a home, takes time to unfold—usually between twelve to eighteen months. Consequently, short-term fluctuations in headline inflation, especially those driven by energy or food price volatility, do not automatically warrant immediate changes to key interest rates.

Recent data show that following a decisive cycle of interest rate hikes from July 2022 to September 2023—which helped tame a historic surge in inflation post-pandemic—the ECB has since begun lowering rates, with the deposit facility rate currently at 2%. Headline inflation in January 2026 stood at 1.7%, slightly below the target, but medium-term projections anticipate a return to the 2% goal by 2028. Core inflation, excluding energy and food, is also expected to move in line with target levels. Crucially, inflation expectations among market participants and professional forecasters remain well-anchored, signaling confidence in the ECB’s commitment to price stability. Moreover, the transmission of monetary policy through financial channels continues to operate as expected, supporting the appropriateness of the current interest rate stance.

The prevailing view is that only persistent and marked deviations from the inflation target over the medium term would prompt a shift in monetary policy. As long as inflation expectations remain anchored and underlying inflation aligns with the target, small and temporary deviations do not necessitate an immediate response. This approach underscores the importance of steady and forward-looking policymaking, ensuring the broader financial system remains stable and resilient amid changing economic conditions.

This measured stance highlights the ECB’s ongoing commitment to maintaining price stability in the euro area, balancing caution with readiness to act if economic conditions shift decisively.