Lagarde hints ECB is in no rush to act: policy is in a favorable position, no preset rate path, all options should be considered.

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After the European Central Bank kept interest rates unchanged for the fourth consecutive meeting and raised economic growth forecasts for this year and the next three years, ECB President Lagarde reiterated that the central bank is in a "favorable position" regarding interest rate policy. This statement aims to balance market expectations for the direction of monetary policy. The ECB expects inflation to be slightly below the 2% target in 2026 and 2027, and not to fully return to target until 2028.

At the ECB post-meeting press conference on Thursday, 18th local time, Lagarde emphasized that although the central bank's policy is in a "favorable position," this "does not mean we are standing still." Members of the ECB Governing Council unanimously believe "all policy options should be kept on the table" and will continue to stick to a meeting-by-meeting, data-dependent decision-making approach, with no preset interest rate paths. Thursday’s rate decision was passed unanimously.

The eurozone economy shows resilience, growing 0.3% in the third quarter. ECB raised several growth and inflation forecasts, with the 2026 inflation expectation raised mainly because service sector inflation is expected to fall more slowly. Uncertainty over the inflation outlook remains higher than usual, preventing the central bank from providing forward guidance.

Lagarde also commented on the issue of her successor, saying the ECB has "no preference" for the next president. She noted that Executive Board member Isabel Schnabel is one of many outstanding candidates and urged legal experts to re-examine whether current Board members are eligible to run for president. The final decision will be made by the European Council.

The euro against the US dollar hit a new intraday low of 1.1713 during European stock trading before the ECB announcement. After the decision, gains expanded; before Lagarde's press conference, it surpassed 1.1760 to a new daily high, but during the conference it gave up gains and turned slightly lower. After the conference, during early US trading, it dropped below 1.1720 again. After Lagarde's press conference, money market pricing showed investors now estimate only about a 16% chance the ECB will raise rates next year.

Economic Resilience, Investment Upside Surprise

At her press conference, Lagarde reiterated the eurozone economy is resilient, saying service-led economic growth will continue in the short term. She said, "We think the economy is undergoing some changes, and there are some upside surprises, especially in investment."

This investment growth does not only come from public sector spending. ECB surveys show investment is largely due to the development of artificial intelligence (AI). AI investment covers several areas, including computing power, telecommunications infrastructure, and intangible asset investment.

Another upside surprise comes from exports. Although exporters have performed better than expected in dealing with US tariffs, Lagarde emphasized that the challenging global trade environment may continue to drag on eurozone growth over the next two years. In the coming years, domestic demand will be the main growth driver, and government spending in European countries on infrastructure and defense should support investment.

The ECB raised its growth forecast on Thursday, expecting 1.4% economic growth in 2025, and 1.2% in 2026. The more optimistic outlook is partly due to Germany’s infrastructure and military spending and Ireland’s continued strong pharmaceutical exports.

Inflation’s Bumpy Path Down, Wages as Key Variable

Lagarde pointed out that inflation has remained in a “narrow range” since spring. Core inflation indicators have changed little in recent months and remain consistent with the 2% medium-term target. Inflation should decline soon, mainly because previous energy price increases will exit annual statistics.

ECB staff forecast average inflation below 2% in 2026 and 2027, with energy inflation mostly negative during that period, while non-energy inflation will gradually fall. In 2028, inflation should return to the 2% target, partly because energy inflation will rise sharply at that time and the ETS2 emissions trading system will be introduced.

Lagarde admitted, “Wage growth surprised us to the upside,” which is the main reason why service inflation was higher than expected. However, wage expectation surveys indicate wage growth will slow in the coming quarters and stabilize below 3% before the end of 2026. Most long-term inflation expectation indicators are still around 2%.

A stronger euro may further lower inflation. Lagarde said the ECB does not target the exchange rate, but will clearly monitor this factor closely.

Uncertainty Prevents Policy Guidance, All Options Remain Open

Facing market hopes for forward guidance, Lagarde stated clearly:

"I know everyone wants forward guidance, but in the current circumstances, given the level of uncertainty we are experiencing, we simply cannot provide forward guidance."

She emphasized that uncertainty "has not changed much, and may have worsened." Given the extent of uncertainty, the ECB did not discuss future rate hikes or cuts on Thursday. All officials are focused on uncertainty, whether related to geopolitics, trade flows with excess capacity countries, or situations on Europe's borders.

Uncertainty about the inflation outlook is still higher than usual. Lagarde listed two-way risks: If the US raises tariffs and weakens demand for eurozone exports, or countries with excess capacity increase their exports to the eurozone, inflation may be lower. Higher financial market volatility and increased risk aversion could drag down demand, also lowering inflation.

Conversely, if more fragmented global supply chains push up import prices, limit key raw material supplies, and intensify capacity constraints in the eurozone economy, inflation may be higher. A slower decline in wage pressures could delay the drop in service inflation, and increased spending on defense and infrastructure could also push up inflation in the medium term.

Lagarde said that market repricing could become a financial stability risk.

Issue of Successor Emerges, Legal Barriers Unresolved

Asked about her successor, Lagarde said:

“I have no preference for any candidate. There are many good options, and Isabel Schnabel is one of them.”

She added, "I find it somewhat satisfying that so many people want my job. It’s a great job—you really feel you can make a difference, influence people’s lives, and work for the EU and our currency, the euro.”

On the legal question of whether current Executive Board members are eligible to stand as president, Lagarde revealed that legal experts had twice reviewed this previously and concluded it was impossible, as the eight-year term is not renewable. Both times involved French citizens—first, then-Vice President Christian Noyer; second, potential candidate Benoit Coeure.

Lagarde called for the issue to be revisited to determine "what is possible, what is not, and under what conditions." She stressed "this isn’t clear" and further in-depth study is required.

Lagarde insisted she would not participate in the selection of her successor. “As to who, what nationality—I won’t comment. It will be decided by the European Council, and the decision will be made outside this beautiful institution.” She also said that resolving this issue will still take quite some time.

Too Early to Judge AI's Impact on Economy, Digital Euro Awaits Political Decision

On the impact of AI, Lagarde said AI is affecting eurozone economic growth, but it’s too soon to say whether AI’s impact will be lasting. She noted that AI may influence the neutral rate by improving productivity, but there is currently too much uncertainty to be sure. In any case, the issue was not discussed in today's meeting.

On the digital euro project, Lagarde said: “This is an important moment for the digital euro because we have completed our work, but now it’s up to the European Council, and of course subsequently the European Parliament, to determine whether the European Commission's proposal is satisfactory, and how to legislate or revise it.”

She stressed that the ECB’s goal is to ensure that in the digital era there is a currency that is the anchor of financial system stability. Currently, that anchor is central bank money, essentially in physical cash form, but in the digital era, there must be a sovereign digital expression and a digital anchor for the financial system.

Russian Asset Issue Must Respect Rule of Law

Asked about the EU's attempt to use frozen Russian assets to support Ukraine, Lagarde responded cautiously, stressing this falls within the remit of European leaders and is an expression of foreign policy. "The central bank should neither hold political views nor make central bank choices as to what is appropriate or inappropriate."

She said the ECB’s duty is to ensure any choices made by leaders respect EU treaties, respect international rule of law, and do not endanger financial stability. “That’s our remit. Anything beyond that is outside our authority.”

However, Lagarde also expressed optimism: "Given the importance of this matter, I am confident they will find a solution. It may be done in the usual European way, you know—repeated discussions, time-consuming, and a lot of speculation. But I believe we’ll find a solution because it’s too important."

She reiterated that the ECB would not violate EU law, but believes EU leaders meeting in Brussels will find a solution.

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