ECB: Policy flexibility returns in 2026 – TD Securities

TD Securities strategists Julie Ioffe and James Rossiter argue that the ECB faces a more benign backdrop in 2026 than in 2022. Energy prices are higher but well below prior peaks, domestic growth and labour markets are more resilient, and inflation has been near target, allowing the Governing Council greater policy flexibility.

ECB compares 2026 backdrop with 2022

"President Lagarde and other Governing Council members have sought to distinguish today’s energy price increases from the 2022 shock. We agree—up to a point. Oil and gas prices are higher but remain far below 2022 peaks, EU gas dependence has fallen, and new regulations cushion consumers from short-term volatility."

"Duration also matters: the earlier shock was much larger and more persistent. That said, the Middle East conflict remains open-ended, and infrastructure damage raises the risk of a longer-lasting supply shock."

"Domestically, the starting point is more robust. Growth proved resilient through 2025, lacking the post-pandemic demand surges & supply bottlenecks of 2022. Labour markets are still tight, but easing vacancies point to weaker bargaining power."

"High household savings provide a buffer, and inflation near target since mid-2025 has cooled wage growth, giving the Governing Council time to monitor external risks."

"The key difference versus 2022 is policy flexibility. Then, sequencing constraints delayed tightening until inflation was entrenched. In 2026, anchored expectations allow time to assess the data—without complacency if risks materialise."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)