The ECB does not touch rates, "risks from war"

European Central Bank unanimously retained i unchanged interest rates and warned that thesoaring energy prices due to war in the Middle East risks fueling inflation and slow down growth in the Eurozone over time. “The war in the Middle East has made the outlook significantly more uncertain, generating upside risks for inflation and downside risks for economic growth,” reads the note at the end of the meeting.

The conflict, it adds, “will have a significant impact on short-term inflation through increases in energy prices”. The medium-term implications “will depend on the intensity and duration of the war as well as on how energy prices will influence consumer prices and the economy”, explains the note.

For the moment, the custodians of the euro have chosen not to change their monetary policy: the deposit rate, which serves as a benchmark, remains fixed at 2%as since July, while inflation has remained around the 2% target in recent months. President Christine Lagarde stressed that the Eurotower “is well positioned to deal with the uncertainty” generated by the conflict in Iran.

“Inflation has remained around the 2% target, longer-term price expectations are firmly anchored and the economy has shown good resilience in recent quarters,” he added. “We are monitoring the situation carefully and our data-driven approach will help us establish the most appropriate monetary policy,” Lagarde said. He also stressed that “any fiscal measures in response to the energy shock should be temporary and targeted.”

New projections

The ECB has published new projections which see upward estimates for inflation and downward estimates for growth.

Inflation

In the basic scenario, overall inflation would be atand on average 2.6% in 2026, 2.0% in 2027 and 2.1% in 2028. Compared to the December projections, inflation has been revised upwards, in particular for 2026, due to the increase in energy prices caused by the war in the Middle East. Inflation net of the energy and food component would average 2.3% in 2026, 2.2% in 2027 and 2.1% in 2028. These values ​​are also higher than the December projections, mainly due to the increase in energy prices which are passed on to inflation net of energy and food.

Pil

ECB experts expect economic growth to average 0.9% in 2026, 1.3% in 2027 and 1.4% in 2028with a downward revision, in particular for 2026, deriving from the worldwide effects that the war will produce on raw materials markets, real incomes and the climate of confidence. At the same time, the low level of unemployment, the solidity of private sector balance sheets, public spending on defense and infrastructure should continue to support growth.

‘Act on instinct’ and the other banks

In the absence of signs of an acceleration in core inflation, which excludes volatile energy and commodity prices, the ECB “really has no reason to raise rates”, Reinhard Pfingsten, head of investments at ApoBank, told AFP. “They will act on instinct,” he added. Other central banks have already opted for prudence. The US Federal Reserve kept rates unchanged yesterday for the second consecutive meeting, explaining that “the implications of events in the Middle East for the US economy are uncertain”. The Bank of England also left its key interest rate unchanged at 3.75% today, as did the Bank of Japan and the Swiss National Bank. These central banks have estimated that overall inflation will be higher in the coming months due to the shock caused by the conflict in the Middle East.