ECB maintains key interest rates amid Middle East uncertainty

The European Central Bank's Governing Council decided to keep its three key interest rates unchanged at its March meeting. The decision comes as the war in the Middle East creates significant uncertainty for the inflation and growth outlook.

Unchanged rates, revised projections

The Governing Council today decided to keep the three key ECB interest rates unchanged, reiterating its commitment to ensure inflation stabilises at the 2 percent target in the medium term.

The war in the Middle East has significantly increased uncertainty, creating upside risks for inflation and downside risks for economic growth, primarily through higher energy prices.

New ECB staff projections, updated to March 11, show headline inflation averaging 2.6 percent in 2026, 2.0 percent in 2027, and 2.1 percent in 2028.

These figures are revised upwards from December, especially for 2026, due to the anticipated impact of the conflict on energy prices.

Inflation excluding energy and food is projected at 2.3 percent in 2026, 2.2 percent in 2027, and 2.1 percent in 2028, also higher than previous forecasts.

Economic growth is now expected to average 0.9 percent in 2026, 1.3 percent in 2027, and 1.4 percent in 2028, a downward revision for 2026 reflecting global war effects on commodity markets, real incomes, and confidence.

Resilience and data dependence

Despite the uncertain outlook, the Governing Council stated it is well positioned to navigate current challenges.

Inflation has been around the 2 percent target, longer-term inflation expectations remain well anchored, and the economy has shown resilience.

Low unemployment, solid private sector balance sheets, and public spending on defence and infrastructure are expected to underpin growth.

The interest rates on the deposit facility, main refinancing operations, and marginal lending facility will remain unchanged at 2.00 percent, 2.15 percent, and 2.40 percent respectively.

The Governing Council will maintain a data-dependent and meeting-by-meeting approach, not pre-committing to a particular rate path.

The Transmission Protection Instrument (TPI) remains available to counter unwarranted, disorderly market dynamics.

A cautious pause in turbulent times

The ECB's decision to hold rates steady reflects a prudent stance in the face of geopolitical uncertainty, prioritizing stability over immediate easing.

While inflation projections are revised up, the underlying confidence in reaching the 2 percent target suggests a readiness to act when conditions allow.

This pause provides valuable time for assessing the full impact of the Middle East conflict on the euro area economy.