Lagarde: Middle East conflict raises inflation risks, dampens growth outlook
The European Central Bank's Governing Council decided today to keep its three key interest rates unchanged. President Christine Lagarde and Vice-President Luis de Guindos highlighted increased uncertainty and upward risks to inflation from the Middle East conflict, alongside downward risks to economic growth.
Conflict clouds inflation outlook
The ECB Governing Council maintained its three key interest rates, reaffirming its commitment to stabilizing inflation at 2 percent over the medium term.
The Middle East conflict introduces significant uncertainty, posing upward risks to inflation and downward risks to economic growth.
Higher energy prices are expected to impact short-term inflation considerably.
The new ECB staff projections, incorporating data up to March 11, forecast average headline inflation at 2.6 percent for 2026, 2.0 percent for 2027, and 2.1 percent for 2028.
This represents an upward revision from December, primarily due to higher energy prices.
Core inflation is projected at 2.3 percent for 2026, 2.2 percent for 2027, and 2.1 percent for 2028, also revised up.
Economic growth is revised down, particularly for 2026, to 0.9 percent for 2026, 1.3 percent for 2027, and 1.4 percent for 2028, reflecting global impacts on commodity markets, real incomes, and confidence.
Resilient economy, persistent price pressures
The euro area economy grew by 0.2 percent in the fourth quarter of 2025, driven by stronger domestic demand, rising real incomes, and near-record low unemployment.
Private consumption and business investments, particularly in R&D and digital technologies, contributed to this growth.
The services sector remained a key driver.
February inflation rose to 1.9 percent (from 1.7 percent in January), with core inflation increasing to 2.4 percent (from 2.2 percent).
Services inflation remained elevated at 3.4 percent.
While wage growth moderated to 3.7 percent, energy price increases due to the conflict are expected to push short-term inflation above 2 percent.
Financial market conditions have tightened, with equity markets falling and short-term euro area market rates rising.
Navigating a volatile landscape
The decision to hold rates reflects a cautious stance amidst heightened geopolitical uncertainty and revised inflation forecasts.
While the economy shows resilience, the upward revisions to inflation and downward revisions to growth underscore the delicate balance the ECB must strike.
This approach signals a strong commitment to price stability, even as it acknowledges the significant external headwinds impacting the euro area.