Stronger Euro Could Shift ECB Policy Outlook, Warns Official
The European Central Bank has entered what officials describe as a “monitoring phase” after the euro climbed roughly 14% in the first half of 2025.
Key Takeaways
- The European Central Bank is assessing the impact of a 14% euro rise in early 2025.
- Martins Kazaks says the full effect will be felt by late spring 2026.
- Further rapid strengthening could force a policy response if inflation drops too much.
Policymakers are now assessing how that rapid currency appreciation will filter through to inflation and growth across the euro area.
Governing Council member Martins Kazaks said on February 13, 2026, that the strongest effects of the rally are still ahead. Historically, exchange rate moves take around 12 months to fully pass through to the broader economy. That means the peak impact of last year’s euro surge is likely to become visible by late spring 2026.
Currency Lag Could Shape Policy Debate
Kazaks stressed that the ECB does not see an immediate need for action. However, he made clear that a further “sizeable and pacey” strengthening of the euro could alter the inflation outlook enough to warrant a policy response.
A stronger currency typically lowers the price of imported goods and energy, easing headline inflation. While this helps bring price growth closer to the ECB’s 2% target, it can also weigh on export competitiveness and corporate margins – particularly at a time when economic momentum remains fragile.
The 2025 rally was driven largely by external factors. A weaker US dollar, amid renewed trade tariff uncertainty under President Donald Trump, boosted the euro. At the same time, Germany’s fiscal pivot improved investor confidence in Europe’s growth prospects, supporting the currency further.
Inflation Projections Already Reflect Stronger Euro
The ECB’s December 2025 projections have already incorporated part of the exchange rate effect. Headline inflation is expected to average 2.1% in 2025, easing to 1.9% in 2026 and 1.8% in 2027. Core inflation is projected to gradually moderate from 2.4% in 2025 to 1.9% by 2027.
On the growth side, real GDP is forecast to expand by 1.4% in 2025, slow slightly to 1.2% in 2026, and recover to 1.4% in 2027. While these figures suggest steady expansion, they also reflect a relatively subdued economic environment.
Kazaks noted that the current weakness in parts of the euro-area economy makes adjustment more challenging for households and businesses. In this context, he argued that structural reforms remain critical to improving resilience and boosting long-term competitiveness.
For now, the ECB appears comfortable holding rates steady while it waits for clearer data. But as the delayed effects of the euro’s 2025 appreciation begin to materialize, currency dynamics could once again move to the center of the euro-area policy debate.
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