Lagarde validates ECB victory over inflation in 2025 Annual Report: 450 basis-point tightening pays off
Frankfurt – Christine Lagarde, President of the European Central Bank, published on 4 May 2026 the ECB Annual Report 2025, marking a milestone in European monetary history. The document constitutes the official record of a pivotal year for euro area monetary policy: 2025 was the year the ECB succeeded in bringing inflation back to a level consistent with its 2% medium-term objective.
The achievement followed a succession of unprecedented crises — pandemic shock, economic repercussions of Russia’s invasion of Ukraine — that had pushed euro area inflation to record highs in late 2022. In response, the ECB undertook the strongest monetary tightening in its history.
Record tightening, then gradual easing
Between July 2022 and September 2023, the ECB raised its policy rates by 450 basis points, moving the deposit facility rate from 0% to 4.50%. The Governing Council committed at the time to maintaining rates at sufficiently restrictive levels for as long as necessary to anchor inflation expectations.
In her published report, Lagarde stated: “In 2025, the ECB succeeded in bringing inflation to a level consistent with its 2% medium-term objective, after a succession of crises — pandemic, economic repercussions of Russia’s unjustified invasion of Ukraine — had driven it to record levels in late 2022. This tightening paid off. Inflation in the euro area slowed sharply, and from mid-2024, the ECB began gradually reducing the restrictive nature of its monetary policy.”
The easing cycle (mid-2024 to mid-2025) brought several successive cuts, lowering the deposit facility rate from 4.00% to 2.00% (current level) and the main refinancing rate from 4.50% to 2.15%. The movement was suspended in June 2025: since then, rates have remained unchanged for eleven months.
Current euro area inflation
Euro area inflation stood at 2.1% in October 2025 according to figures cited by Banque de France Governor François Villeroy de Galhau, and has hovered around this target for the past six months. France experienced a more accommodating trajectory (0.9% in October 2025) before rebounding to 2.2% in April 2026 (IPCH). Dispersion among Member States remains a complexity factor.
Transatlantic divergence
The ECB at 2.00% on the deposit rate stands against the US Federal Reserve and the Bank of England, both at 4.00%. This 200-basis-point divergence reflects distinct inflation and growth trajectories — more persistent US inflation and a tighter US labour market. The euro remains under structural pressure against the dollar, with EUR/USD parity at around 1.06-1.08.
2026-2027 outlook
The ECB’s internal projections, published in December 2025, anticipate core inflation averaging 2.2% in 2026 before gradually returning to 2.0% in 2028. The Reuters survey of January 2026 indicates that 85% of economists polled expect rates to remain unchanged through the end of 2026, with a possible 25-50 basis-point cut in 2027 if wage dynamics ease.
For investors, the maintained accommodation supports a rotation toward cyclical equities and small caps. Sovereign bond yields are stable: French OAT 10-year around 3.15%, German Bund 2.50%, France-Germany spread stable at 65 basis points.
