The ECB Governing Council meeting of 18–19 March 2026 took place in an environment shaped by a major geopolitical shock—the war in the Middle East—which significantly affected energy markets, inflation dynamics, financial conditions, and the economic outlook.
Scenarios and communication
Members agreed to publish baseline, adverse, and severe scenarios to better communicate the range of uncertainty surrounding the war’s economic impact. They also supported publishing an additional set of projections based on an earlier technical cut-off date, illustrating a faster resolution of energy-market disruptions. These scenarios were intended as illustrative tools rather than alternative forecasts, and staff would continue updating them regularly.
Financial and market conditions
Financial conditions had tightened since the previous meeting. Energy prices surged, equity markets declined, and volatility increased. Market participants expected near-term rate hikes, reflecting higher inflation risks. However, euro area banks remained resilient. Private credit markets and technology-sector valuations were identified as potential financial stability risks, though the banking sector was seen as well capitalised.
Inflation, growth, and outlook
The war led to a sharp increase in energy prices, pushing near-term inflation significantly higher than previously expected. At the same time, medium-term inflation expectations remained anchored around the 2% target.
Growth prospects deteriorated due to reduced real incomes, weaker confidence, and higher uncertainty. The euro area outlook was revised downward, especially for 2026, although domestic demand, services, and investment in defence, infrastructure, and digitalisation continued to provide support.
Scenario analysis suggested that a prolonged energy shock would raise inflation and depress growth, while a quicker resolution would limit these effects.
Policy stance
The Governing Council decided to keep interest rates unchanged. The key argument was that uncertainty was exceptionally high and the inflation impact—especially in the medium term—was not yet clear. While near-term inflation risks were tilted upward, the medium-term outlook still showed inflation converging toward the 2% target.
Policy was described as data-dependent and meeting-by-meeting, with no pre-commitment to a rate path. The Council emphasised flexibility and optionality, given the rapidly evolving situation.
Inflation risks and second-round effects
A central debate concerned whether the energy shock would lead to persistent second-round effects through wages and pricing. Some members warned that tight labour markets and recent inflation experience could amplify wage-price dynamics. Others argued that weaker demand and cooling wage growth could limit such effects.
The discussion highlighted key uncertainties: duration of the conflict, energy supply disruptions, fiscal responses, and global spillovers.
Comparison with 2022
Members stressed differences from the 2022 energy crisis:
- inflation is currently near target (vs. ~6% then)
- demand conditions are weaker
- supply chains are less strained
- fiscal and monetary policy are more neutral
- energy diversification in Europe has improved
However, it was also noted that inflation memories from 2022 could make households and firms more reactive, potentially increasing the risk of faster pass-through.
Communication and forward guidance
The ECB reaffirmed that it would:
- remain vigilant and data-driven
- act if inflation risks became entrenched
- ensure inflation stabilises at 2% in the medium term
- closely monitor expectations, wages, pricing behaviour, and financial conditions
Scenario analysis and high-frequency indicators were highlighted as key tools for future decisions.
