Brussels, September 29 — The European Central Bank (ECB) shared its assessment of the euro area economy and monetary policy during a hearing before the Committee on Economic and Monetary Affairs of the European Parliament on September 28. In the spotlight was the euro area economic outlook, with the ECB representative highlighting resilience in the second quarter of 2026, reporting solid real GDP growth across most countries and sectors.
Manufacturing received a boost from increased government spending on defense and infrastructure, while services recovery was aided by a rebound in consumer confidence. AI-related activity was on the rise in digital services, business investment, and exports.
Unemployment remained at 6.4% in July 2026, but employment and labor force growth continued to slow. Productivity showed a gradual increase, while consumption was anticipated to be supported by falling energy prices, a robust labor market, and growth in business and housing investment. Exports were expected to benefit from stronger foreign demand.
Inflation increased to 3.2% in August 2026, driven by energy inflation rising to 14.3% from 10.3% in July, reflecting strong refining margins on liquid fuels and higher energy commodity prices. Food price inflation decreased slightly to 1.1% in August 2026.
Inflation excluding energy and food edged down to 2.4% in August 2026 due to a fall in services inflation, only partially offset by an increase in goods inflation. Wages showed no significant response to the energy shock, with nominal wage growth at 3.3% in the second quarter of 2026, down from 3.6% in the first quarter.
The ECB projected headline inflation averaging 3.0% in 202026, 2.5% in 2027, and 2.1% in 2028, while inflation excluding energy and food was expected at 2.5% in 2026, 2.6% in 2027, and 2.3% in 2028. Inflation expectations over shorter horizons remained elevated, but most longer-term measures stood around 2%, supporting medium-term stabilization of inflation at the target. The outlook was surrounded by high uncertainty, with upside risks for inflation and downside risks for growth.
In line with the ECB’s commitment to stabilizing inflation at its 2% target in the medium term, the three key ECB interest rates were raised by 25 basis points at the monetary policy meeting earlier in September 2026. Turning to artificial intelligence, the ECB representative described it as a transformative force capable of reshaping production processes, business models, and structures across the economy, with uncertain overall macroeconomic effects working through interconnected demand and supply-side channels over time.
The focus for the hearing was on the channels most relevant for inflation outlook: productivity and investment. The ECB’s strategy in response to energy shocks is to not react to energy prices directly but to act if risks of higher energy prices becoming embedded in inflation are observed, assessed via three criteria: inflation outlook, dynamics of underlying inflation (particularly how energy prices feed through to other prices and wages), and transmission of monetary policy to borrowing costs and growth.
At the time of the hearing, the ECB saw higher inflation ahead in 2027 and 2028 than previously expected, mostly due to higher energy prices, but no evidence of energy prices feeding into higher wages. Long-term interest rates had risen notably since the last meeting, which would slow growth and reduce pass-through more than projected.
The ECB concluded it remained on a ‘middle path’ for monetary policy — viewing a measured response as appropriate given the shock was too large to look through, but necessary to keep inflation in check. The committee hearing was the latest in a series of events examining the impact of AI on the European economy.
