ECB holds interest rates steady

The European Central Bank has left its three key interest rates unchanged, as policymakers grapple with heightened uncertainty stemming from the war in the Middle East and its impact on inflation and economic growth.

In a statement following its latest meeting, the ECB’s Governing Council said it remains committed to ensuring inflation stabilises at its 2% target over the medium term, even as risks to the outlook intensify.

The central bank kept the deposit facility rate at 2.00%, the main refinancing rate at 2.15%, and the marginal lending rate at 2.40%.

The Governing Council warned that the war in the Middle East has made the economic outlook “significantly more uncertain,” creating upward pressure on inflation and downside risks for growth. Rising energy prices are expected to have a “material impact” on inflation in the near term, while the longer-term effects will depend on how prolonged and severe the conflict becomes.

Despite these risks, the ECB said it is “well positioned” to navigate the uncertainty, noting that inflation has been close to target, longer-term expectations remain anchored, and the euro area economy has shown resilience in recent quarters.

New ECB staff projections – incorporating data up to 11 March – show inflation averaging 2.6% in 2026, before easing to 2.0% in 2027 and 2.1% in 2028. The upward revision, particularly for 2026, reflects higher expected energy prices linked to the conflict.

Core inflation, which excludes energy and food, is projected at 2.3% in 2026, gradually declining to 2.1% by 2028, also slightly higher than previously forecast.

At the same time, economic growth projections have been revised downward. The euro area economy is now expected to grow by 0.9% in 2026, followed by 1.3% in 2027 and 1.4% in 2028.

The ECB cited the broader global effects of the conflict, including pressure on commodity markets, reduced real incomes, and weaker confidence, as key factors behind the downgrade. However, low unemployment, solid private sector balance sheets, and increased public spending are expected to continue supporting growth.

The Governing Council emphasised that future decisions will be guided by incoming data and assessed on a meeting-by-meeting basis. It reiterated that it is not pre-committing to any specific path for interest rates.

Scenario analysis by ECB staff suggests that a prolonged disruption to oil and gas supplies could push inflation higher and growth lower than current baseline projections, depending on the scale of indirect and second-round effects.