ECB holds key rates steady amid Middle East war uncertainty

The European Central Bank's Governing Council decided to keep its three key interest rates unchanged. The decision comes as the war in the Middle East introduces significant uncertainty, posing upward risks to inflation and downward risks to economic growth.

Inflation projections revised upwards

The European Central Bank's Governing Council today decided to keep its three key interest rates unchanged.

The deposit facility rate remains at 2.00 percent, the main refinancing rate at 2.15 percent, and the marginal lending rate at 2.40 percent.

New staff projections, incorporating data up to March 11, show overall inflation averaging 2.6 percent for 2026, 2.0 percent for 2027, and 2.1 percent for 2028.

This represents an upward revision for 2026 compared to December's projections, driven by higher energy prices due to the Middle East war.

Inflation excluding energy and food is now projected at 2.3 percent for 2026, 2.2 percent for 2027, and 2.1 percent for 2028, also higher than previously expected due to the pass-through of energy costs.

Economic growth projections have been revised downwards, particularly for 2026, reflecting the global impact of the conflict on commodity markets, real incomes, and confidence.

Navigating uncertainty with data

The Governing Council affirmed its readiness to manage uncertainty, noting inflation is near its 2 percent target and longer-term expectations are firmly anchored.

The economy has also proven resilient.

Incoming data will be crucial for assessing the Middle East war's impact on the inflation outlook and associated risks, guiding the ECB's data-dependent monetary policy approach.

The Council reiterated its commitment to ensuring inflation stabilizes at 2 percent over the medium term.

The Transmission Protection Instrument (TPI) remains available to counter unjustified market dynamics that could threaten monetary policy transmission.

The APP and PEPP portfolios continue to decline at a measured and predictable pace.

Prudent pause in turbulent times

This decision reflects a cautious stance, prioritizing stability amidst geopolitical volatility rather than reacting to short-term data shifts.

While the upward revision to inflation projections suggests underlying pressures, the ECB's commitment to a data-dependent approach allows flexibility for future adjustments.

The emphasis on the TPI underscores ongoing concerns about market fragmentation, even as rates remain on hold.