Lagarde flags global uncertainty, inflation and growth risks

The global economy is navigating turbulent waters, with competing forces creating a complex and uncertain environment.

While rising AI-related investments and fiscal policies support growth, geopolitical and trade tensions act as significant headwinds.

The war in the Middle East, in particular, has sharply increased energy prices, negatively impacting global growth and posing upside risks to inflation.

For the euro area, economic activity expanded by 1.4 percent in 2025, supported by rising real incomes and solid domestic demand.

However, the latest ECB staff projections for 2026 foresee real GDP growth at 0.9 percent, rising to 1.3 percent in 2027 and 1.4 percent in 2028.

Risks to this growth outlook are tilted to the downside, primarily due to the Middle East war, tighter global financial conditions, and trade frictions.

Lagarde emphasized the urgent need to strengthen the euro area economy while maintaining sound public finances, advocating for temporary, targeted, and tailored fiscal responses to energy price shocks.

Headline inflation in the euro area rose to 2.6 percent in March from 1.9 percent in February, driven by an increase in energy inflation.

Core inflation eased slightly to 2.3 percent.

The March ECB staff projections revised up headline inflation for 2026 to 2.6 percent, mainly due to higher expected energy prices from the Middle East war.

Risks to the inflation outlook are tilted to the upside.

The Governing Council kept key ECB interest rates unchanged in March, determined to stabilize inflation at its 2 percent target.

The ECB will follow a data-dependent, meeting-by-meeting approach, without pre-committing to a specific rate path.

Separately, the Eurosystem enhanced its EUREP facility in February, providing standing access for non-euro area central banks from Q3 2026 for backstop euro liquidity in a volatile global environment.