European Central Bank (ECB) policymaker Gabriel Makhlouf has highlighted two key risks to the euro zone’s economic outlook: weakening growth momentum and the possibility of a more entrenched undershoot of the ECB’s 2% inflation target.
In a recent blog post on the Irish Central Bank’s website, Makhlouf noted that while long-term inflation expectations remain anchored at 2%, the situation requires close monitoring. “This does not currently suggest a persistent undershoot dynamic,” he wrote, “but we continue to closely monitor developments here.”
He emphasized that a prolonged period of inflation below target could pose challenges for monetary policy. Therefore, the ECB must stay vigilant even as headline inflation stabilizes.
Importantly, Makhlouf pointed to wage growth as a critical indicator. He explained that surveys and forecasts project wage increases of around 3% between 2026 and 2028. If realized, this trend would help prevent a sustained inflation undershoot by supporting domestic demand and price pressures.
Moreover, stable wage growth would reinforce the ECB’s confidence in its current policy path. It would also reduce the risk of deflationary dynamics taking hold in the medium term.
At the same time, Makhlouf warned that fading economic momentum across the euro area adds uncertainty. Slower growth could dampen consumer spending and business investment—further pressuring inflation downward.
Consequently, the ECB faces a delicate balancing act. On one hand, it must avoid premature easing that could reignite inflation. On the other, it must guard against overtightening if growth stalls and disinflation deepens.
In sum, the ECB inflation outlook hinges on both labor market trends and broader economic resilience. As Makhlouf made clear, the central bank will keep a watchful eye on wages, expectations, and growth—ready to adjust course if either risk materializes.
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