By Paul Hannon


The euro's gains against the U.S. dollar this year will help cool eurozone inflation over a three-year period, and to a significant degree after a year, European Central Bank Chief Economist Philip Lane said Wednesday.

ECB officials have repeatedly said they are in a "good place," and many economists expect the bank to leave its key interest rate at 2% over the coming year.

However, one source of lower inflation that could prompt policymakers to consider another rate cut is the euro's appreciation against the dollar, which lowers prices of imported goods and services and weakens demand for the currency area's exports.

In a speech, Lane said modeling by the central bank's economists show that in response to a 10% gain in the euro's exchange rate, inflation is "markedly" lower for three years, with a "peak" impact of 0.6 percentage points after a year.

The inflation rate was 2.2% in November. In a speech to lawmakers also delivered Wednesday, ECB President Christine Lagarde said policymakers don't expect to see a significant change in the immediate future.

"We expect inflation to stay around our 2% target in the coming months," she said. "Risks to the outlook continue to be two-sided, while uncertainty remains higher than usual owing to volatile global trade policies."

The euro has appreciated by more than 12% against the U.S. dollar in 2025.

Much of the euro's appreciation was in place by mid-year. In his speech, Lane didn't discuss the appropriate rate response to the currency's gains.

"The exchange rate is just one variable among many in determining euro area macroeconomic dynamics and our overall evaluation of economic and financial developments is based on an integrated assessment of all relevant factors," he said.

Lane said the ECB would not respond to "small, transitory" deviations of inflation from its target, but would change policy in response to "large, sustained" departures.

However, the proper response to deviations that fall in between those two poles is less certain.

"Clearly, it is a judgment call to determine how to respond to intermediate-category inflation deviations," he said.


Write to Paul Hannon at paul.hannon@wsj.com


(END) Dow Jones Newswires

12-03-25 0919ET