Lagarde: ECB stays on a middle path; AI is a quarter of firms' credit growth
Victoria Shinder2 min readECB President Christine Lagarde explained the bank's September rate increase to the European Parliament's Committee on Economic and Monetary Affairs on 28 September, and used the rest of the regular hearing to set out how artificial intelligence could affect inflation.
The Governing Council raised its three key interest rates by 25 basis points earlier this month. Lagarde said the ECB does not react to energy prices as such, only to the risk that they become embedded in inflation, and that it judges this on three criteria: the inflation outlook, underlying inflation dynamics, and the transmission of policy. On all three she saw higher inflation ahead but no sign yet of it becoming embedded, with the outlook for 2027 and 2028 higher than expected a few months ago, mostly because of energy, and no evidence so far of energy prices feeding into wages. Compensation per employee grew 3.3% in the second quarter, down from 3.6%. She added that long-term rates have risen notably since the last meeting, which will slow growth and pass-through by more than projected. The result, in her words, is that the ECB stays on the middle path: the shock is too large to look through, and a measured response is appropriate.
The numbers she cited: headline inflation rose to 3.2% in August from 2.9%, with energy inflation at 14.3%; inflation excluding energy and food eased to 2.4%. Staff projections see headline inflation at 3.0% in 2026, 2.5% in 2027 and 2.1% in 2028, and growth of 0.9%, 1.4% and 1.5%. Unemployment was 6.4% in July.
On AI, Lagarde said firms are set to devote around 10% of total investment to it in 2026 and that AI-related borrowing already accounts for roughly a quarter of credit growth to firms. An ECB survey found 38% of euro area firms reporting at least moderate AI use by late 2025, but only 7% significant use. She warned that equity valuations are concentrated in a small number of AI firms that are rapidly taking on debt, and that a sharp reassessment could spill over to euro area investors.
What it means
The hearing restated the reaction function rather than signalling the next move: wages are the test, and so far they are passing it. The AI figures are new in this setting, and the credit share is the one to watch, because a quarter of corporate loan growth tied to one theme is a concentration a central bank that also supervises banks will not ignore.