ECBs Legarde is speaking and says:
- climbing energy costs will push up input prices.
- Price increases may then be passed to consumer.
- We should be well-placed to react, when needed
Current rates: The ECB at their last meeting last week held rates unchanged, with the main refinancing rate at 2.15% and the deposit facility at 2.0%, as policymakers adopted a cautious stance to assess the impact of the Iran/Middle East war on inflation and growth
Key driver of uncertainty: The war in the Middle East has made the outlook significantly more uncertain, creating upside risks for inflation and downside risks to economic growth, with a material near-term impact through higher energy prices.
Market pricing for the next move: Markets are fully pricing in three ECB rate hikes in 2026, with the first potentially arriving as early as June — a notable shift driven by the energy price shock. Commentary has been more hawkish
ECB's own stance: The ECB is following a data-dependent, meeting-by-meeting approach with no pre-commitment to a particular rate path. Its decisions will be based on the inflation outlook, incoming data, underlying inflation dynamics, and the strength of monetary policy transmission.
Inflation outlook: In the ECB's March baseline projections, headline inflation is seen averaging 2.6% in 2026, 2.0% in 2027, and 2.1% in 2028 — revised up compared to December, largely because energy prices will be higher due to the Middle East conflict.
Growth: Staff expect economic growth to average 0.9% in 2026, 1.3% in 2027, and 1.4% in 2028 — a downward revision reflecting the global effects of the war on commodity markets, real incomes, and confidence.
In short, the ECB is in a tricky spot: energy-driven inflation is pushing market expectations toward hikes, while growth risks pull the other way. The June meeting will be closely watched, especially with new staff projections expected.
