The European Central Bank left interest rates unchanged by a unanimous vote, but at the same time set the stage for possible action down the line, thanks to a rapid update of its macroeconomic scenarios as of March 11—which therefore already factored in the effects of the war in Iran. In its official statement, the ECB states that it is “well positioned to deal with this uncertainty,” thanks to a very different starting point compared to 2022, when the energy shock hit an economy already grappling with much higher inflation.
In the baseline scenario developed by ECB staff—which, as Christine Lagarde noted, does not incorporate any future rate changes—growth has been revised downward and inflation upward. Specifically, headline inflation is expected to average 2.6% in 2026, 2.0% in 2027, and 2.1% in 2028. For inflation excluding energy and food, staff project an average of 2.3% in 2026, 2.2% in 2027, and 2.1% in 2028. “This profile is also higher than that of the December projections, mainly due to the pass-through of higher energy prices to core inflation.” On the growth front, the new estimates point to average GDP growth of 0.9% in 2026, 1.3% in 2027, and 1.4% in 2028.
“The medium-term implications will depend both on the intensity and duration of the conflict and on how energy prices feed through to consumer prices and the economy,” the Governing Council stated, reiterating its data-dependent, meeting-by-meeting approach.
The lesson of 2022 weighs on the ECB’s approach
The overall tone of the press conference, however, suggested an ECB reluctant to wait too long. The lesson of 2022—when the Frankfurt-based institution took five months after Russia’s invasion of Ukraine to raise rates—appears to have prompted a more vigilant stance toward the risk that the energy shock could spread to the economy.
“Over the past four years, we have learned a great deal. We have improved our models. We have changed our strategy. And now, in particular, we are paying closer attention to the risks surrounding the baseline scenario,” Lagarde said. The president then emphasized the crucial difference from the past: “I believe another factor to keep in mind is that, in 2022, when the shock hit, inflation was already at 6%. This is a huge difference from the current situation, where the latest reading was 1.9%.”
Lagarde also added an important caveat, however: “Inflation expectations have a lot to do with the inflationary memory embedded in households and businesses. In 2022, that memory went back a long way. Today, however, it is quite fresh, because people have experienced inflation firsthand.” In other words, the ECB might choose to react more quickly precisely because it expects workers and businesses to be quicker in demanding adjustments to a cost of living that has already eroded purchasing power in recent times.
The president also clarified the focus of Frankfurt’s attention in the coming weeks: “We must equip ourselves with the best analytical tools and the best possible foresight to understand where these indirect and second-round effects are heading, assuming they materialize.”
Markets perceive a more hawkish ECB
These remarks triggered typical “hawkish” market reactions. The euro gained 0.59% against the dollar, rising to 1.1519. The yield on the one-year German Bund rose to 2.35%, while the one-year Italian government bond yield rose more moderately to 2.391%.
No real reaction, however, from the stock market: the FTSE MIB remained deep in the red, down 2.44%, a sign that for now the ECB’s message weighs more heavily on rate expectations and fixed income than on the risk appetite of equity investors.
“Lagarde appeared reluctant to provide precise guidance on monetary policy, but the strong emphasis on risks linked to the conflict, vigilance regarding second-round effects, and significant revisions to macroeconomic projections (including core inflation) were not enough to shake the markets’ conviction that the ECB will be forced to raise rates later this year,” commented Ebury senior analyst Roman Ziruk, “this more ‘hawkish’ stance reinforces our view that the ECB is now more inclined to raise rates than to cut them. With investors now assigning a 50% probability to a rate hike as early as next month, the euro remains well supported in today’s trading session, despite the surge in natural gas prices that had initially dampened sentiment.”
