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ECB President Christine Lagarde told the European Parliament’s economic affairs committee on September 28 that euro-area growth remained resilient while inflation rose to 3.2% in August. She explained the ECB’s recent 25-basis-point rate increase and said AI could affect productivity, jobs and inflation, though its overall economic impact remains uncertain.
Lagarde said euro-area real GDP grew solidly in the second quarter of 2026, with growth spread across most countries and sectors, and that the pattern was expected to continue in the third quarter. She pointed to manufacturing supported by defence and infrastructure spending, recovering services as consumer confidence improved, and AI-related activity in digital services, investment and exports. The ECB’s September staff projections put growth at 0.9% in 2026, 1.4% in 2027 and 1.5% in 2028.
Inflation increased from 2.9% in July to 3.2% in August, according to the figures Lagarde presented. Energy inflation rose to 14.3% from 10.3%, reflecting higher energy commodity prices and refining margins for liquid fuels. Inflation excluding energy and food eased to 2.4%, while compensation per employee grew 3.3% in the second quarter, down from 3.6% in the first. The ECB’s September baseline projected headline inflation averaging 3.0% in 2026, 2.5% in 2027 and 2.1% in 2028.
Earlier in September, the ECB raised its three key interest rates by 25 basis points. Lagarde said the bank was responding to the risk that energy costs could spread into broader inflation, while reporting that it had not yet seen evidence of the shock feeding into higher wages. She also said long-term interest rates had risen since the previous policy meeting, a development expected to weigh on growth and affect monetary policy transmission.
Rates Face an Energy Shock
The hearing set out how the ECB is weighing an energy-driven inflation rise against an economy that has so far continued to grow. Lagarde said the bank would not react mechanically to energy prices; it looks for signs that higher costs are becoming embedded through broader prices and wages. That distinction matters for households and businesses because persistent inflation could keep borrowing costs higher, while tighter financial conditions can also slow investment and demand.
AI adds a longer-term policy question. Lagarde said firms were expected to devote around 10% of total investment to AI in 2026, and AI-related borrowing already represented roughly a quarter of credit growth to firms. She described potential gains in productivity and competitiveness alongside possible effects on labour markets and inflation. Those figures indicate growing economic exposure to AI, but do not establish how large its eventual productivity gains or employment effects will be.
The ECB’s Three-Part Test
Lagarde described the ECB’s approach to energy shocks through three criteria: the inflation outlook and its risks; underlying inflation, including whether energy costs feed into other prices and wages; and how monetary policy passes through to borrowing costs and economic growth. She said the current outlook pointed to higher inflation ahead, especially in 2027 and 2028, but that wage data did not yet show a material response to the energy shock.
The September projections also showed different paths for headline inflation and inflation excluding energy and food. The latter was projected at 2.5% in 2026, 2.6% in 2027 and 2.3% in 2028. Lagarde said shorter-term inflation expectations remained elevated, while most longer-term measures were around 2%. The ECB’s stated medium-term inflation target is 2%.
“We do not react to energy prices, we react if we see risks of higher energy prices becoming embedded in inflation.”
— Christine Lagarde, European Central Bank president
AI’s Effects Remain Unsettled
Lagarde’s speech did not quantify AI’s eventual effect on euro-area productivity, employment, wages or inflation. The investment and credit figures describe activity in 2026; they do not establish the scale or timing of future economy-wide gains. The available source text also ends as Lagarde begins describing the channels through which AI may affect the economy, so it does not provide her full discussion of those mechanisms.
For the near-term outlook, the speech identified high uncertainty, with risks of higher inflation and weaker economic growth. It remained unclear whether energy costs would spread to wages and other prices. The September projections are a baseline, not a guarantee of the future path.
Inflation Data Will Guide Policy
The ECB’s next decisions will depend on incoming data and its assessment of the three policy criteria Lagarde outlined. The speech did not announce a date or outcome for a subsequent rate decision. Policymakers will be watching whether energy inflation eases, whether wage growth or underlying prices respond to the shock, and how higher long-term rates affect activity.
Further evidence will also be needed to assess AI’s effects as firms invest and adopt the technology. Lagarde said the ECB would consider AI because it may shape investment, labour markets and inflation, but her remarks did not set out a specific forecast for those effects.
Key Questions
What did Lagarde discuss at the hearing?
She addressed the euro-area economic outlook, the ECB’s recent interest-rate increase, inflation and the uncertain effects of artificial intelligence on the economy.
Why did the ECB raise interest rates?
Lagarde said the ECB raised its three key rates by 25 basis points earlier in September as part of its response to inflation risks from higher energy prices. She said the bank looks for signs those costs are becoming embedded in broader inflation.
What was euro-area inflation in August 2026?
Lagarde reported that headline inflation rose to 3.2% in August from 2.9% in July. Energy inflation was 14.3%; inflation excluding energy and food was 2.4%.
What did Lagarde say about AI’s economic impact?
She said AI could reshape production and business models and potentially affect productivity, competitiveness, jobs and inflation. She described its overall macroeconomic effect as uncertain.
Source: primary
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