Interview with Nikkei

Interview with Philip R. Lane, Member of the Executive Board of the ECB, conducted by Shogo Akagawa and Shiori Goso on 19 May 2026

26 May 20256

The Middle East continues to face heightened geopolitical tensions. How do you assess the potential impact on the euro area economy, and do you see any need to revise your macroeconomic projections at the June Governing Council meeting?

There are several factors related to the Iran war that show that the macroeconomic outlook has gotten worse. We can see from the survey data and other indicators that there is an increase in uncertainty. High energy prices are pushing down consumption and investment in Europe. As the euro area is a large net importer of energy, this is an important drag on economic activity. A prolonged conflict in the Middle East could lead to a more prolonged period of economic weakness. To some extent, this downside had already been incorporated into the March forecast, but we will assess in June whether further revisions are needed.

How serious do you consider the current inflation outlook to be?

Oil prices have been above what we had in the March projections, and if they remain elevated, the impact on the global economy could become larger. On the other hand, for gas – which is particularly important for Europe – the impact has been relatively limited, partly due to expectations of increased supply from the United States. On net, I still think that there has been upward pressure on inflation. We are likely to make a further upward adjustment to the inflation forecast in June.

How concerned are you about the risk of more persistent medium-term inflation dynamics? Do you see signs that second-round effects may be starting to materialise?

We do expect indirect effects beyond energy prices. Our surveys suggest many firms expect that they will have to raise prices. If this develops from an energy shock into a broader inflation problem, that would be a major issue. A lot turns on the how quickly there can be a resolution to the war. If the war is prolonged, I think two channels are going to determine how this unfolds – the first is the size of the direct effects on prices, the second is damage to the world economy. For example, the airline industry uses a lot of fuel so it has already adjusted prices. However, now we’re seeing some airlines reversing some of those price hikes because demand is falling. The question is, are they limited or do they become more significant? We’re still in monitoring mode.

Germany, the euro area’s largest economy and a key engine of growth, is facing mounting headwinds in its automobile industry amid slowing demand from China. To what extent do you see this affecting the outlook for the euro area economy as a whole?

There are obviously structural changes around the world and Germany has encountered this issue as well. The automotive sector has been adjusting for many years, since its peak around a decade ago. While exports, including those to China, remain important, there has been a shift toward strengthening domestic demand and diversifying export markets – for example, through new European Union trade agreements with Latin America and India. Remember, however, that unemployment is very low in a European context and for Germany there was a big shift in fiscal policy, partly driven by a desire to strengthen defence. What we see now is the direct effect on many firms that are competing to fill orders from German defence spending, which is a boost to the European economy.

According to the market consensus, a rate hike in June is expected. Do you share this view?

In a world of uncertainty, we do not pre-commit. But I can explain our thinking through three scenarios. First, if the energy supply shock is small and temporary, we can look through it. Second, if it is persistent but medium-sized, some interest rate response may be appropriate but it would be limited and not a full tightening cycle. Third, if the shock becomes large and broadens out in a non-linear way, then a stronger monetary policy response would be needed.

Which of these three scenarios do you think is closest to the current situation?

We are currently assessing the magnitude of the shock. The longer the conflict continues, the less likely the most benign scenario – where it is just a temporary spike in energy prices – becomes. It is also true that oil prices are likely to remain elevated for longer compared with our March assumptions.

If the ECB were to “look through” and hold rates steady in June, it would be a surprise to the market.

I think the market pricing of future interest rates is very sensitive to the price of oil. They are moving together without needing any explicit signalling from us. They see the same shock that we see. I don’t think the market needs some kind of extra guidance from us.

If the ECB decides to raise rates in June, how would you communicate whether this should be understood as a one-off adjustment or the beginning of a broader tightening cycle?

I don’t think we need a complete vision for the future by June, because the vision for the future will depend on the incoming data. Subsequent decisions – in July, September and beyond – will depend on incoming data. We do not pre-commit to a particular path for policy rates. Essentially, we’ll still be debating those options.

There was criticism that the ECB was too late in responding to the inflation shock after Russia’s invasion of Ukraine. How confident are you that the Governing Council is not at risk of repeating the same mistake this time? How does the current situation differ from that period?

In 2022 we faced a very large shock, particularly a significant increase in gas prices following Russia’s invasion of Ukraine. At the same time, the European economy was reopening after the pandemic, with strong demand in sectors like tourism and services, which reinforced inflationary pressures. By contrast, demand conditions in Europe today are not strong. In 2022 we started from negative interest rates and had to shift from an accommodative to a restrictive stance. This time, we entered the shock in a broadly neutral position, with policy rates around 2 per cent and inflation around 2 per cent. So the context is different.

Long-term interest rates have been rising in countries such as France due to concerns about fiscal discipline. How do you assess the risks in the European bond market?

The bond market in the European Union has been fairly stable. There has been a gradual increase in term premiums but this is a global phenomenon. Importantly, the European Union fiscal framework provides an anchor of stability, as Member States are required to adhere to jointly agreed fiscal targets and plans.

Despite years of discussion, Europe’s capital markets remain fragmented. How do you evaluate the progress towards deeper market integration and a genuine single market? What potential do you see for European assets to attract more global capital?

To take full advantage of having this large currency area, we need to build more fully developed capital markets, including deeper bond and equity markets. A large market provides both safety and liquidity. If there is sufficient consensus to issue more euro-denominated bonds, that would be very attractive for global investors and it would strengthen the international role of the euro and enhance Europe’s position as a safe haven. More broadly, the larger the European Union financial market becomes, the bigger the pool of euro-denominated assets available, making it increasingly attractive for global investors, including those in Asia.

We want to ask one question from the Japanese point of view. In contrast to the ECB, where the policy rate is around 2 per cent, Japan still has very low real interest rates and remains accommodative. How should monetary policy be assessed in such a case?

Monetary policy must always be assessed relative to the long-term average or steady-state level. For the ECB, being close to that level means that tightening requires raising rates. For the Federal Reserve or the Bank of England, where rates are above neutral, tightening can be achieved simply by postponing rate cuts. For the Bank of Japan, the policy rate is assessed to be below the long-term average. So I suppose the discussion there is going to be about the speed at which you go to the long-term average.

In Japan, the persistent weakness of the yen has led to foreign exchange intervention by the authorities. At the same time, the G7 framework emphasises that excessive or disorderly movements in exchange rates are undesirable, while intervention should remain exceptional. How do you assess the role of exchange rates within the broader conduct of monetary policy?

Intervention is generally considered an exceptional tool and I would leave it to the judgment of the Japanese authorities about when to use it. If exchange rates move very quickly and volatility increases, the authorities responsible – be they finance ministries or central banks – need to take that into account.

We are also deeply concerned by the apparent retreat of democracy and the rule of law in many parts of the world. In a world increasingly marked by geopolitical fragmentation, war and political uncertainty, has the task of preserving price stability become significantly more difficult for central banks? Do you sometimes see a dilemma in navigating monetary policy in such an environment?

I wouldn’t phrase it as a dilemma but I would say you’ve captured very important issues.

In our strategy review exercises conducted since President Lagarde’s arrival at the ECB, we have said we think the world is going to face more structural shocks: demography, climate change, energy shock, digitalisation, artificial intelligence and a change in geopolitics.

But, in terms of geopolitical shocks, central banks have had to deal with this for a long time. Obviously, the oil shocks of 1970s were connected to major geopolitical events at the time, like the war in the Middle East and the Iranian Revolution.

On the one hand, some policy moves are anti-globalisation. On the other hand, I think a lot of the technology boom is pro-globalisation because supply chains are so big and so specialised that despite tariffs there are still a lot of exemptions for trade in electronics and so on. So in the end I agree with you, it’s complex – but I think more than ever, as you say, we need central banks to provide an anchor of stability.