The European Central Bank kept interest rates unchanged in March and signaled it will continue to set policy on a meeting-by-meeting basis, as officials weigh rising inflation risks from the conflict in the Middle East against a fragile growth outlook.
Minutes from the meeting, published Thursday, show policymakers see “heightened uncertainty” around the inflation path and prefer to wait for more data before adjusting policy. The Governing Council judged “the option value of waiting was high,” and reiterated that any move will depend on incoming economic and geopolitical developments rather than a pre-set path.
Energy shock and inflation risks
Officials highlighted the conflict in the Middle East as a key source of potential inflation and growth risks, mainly through higher energy prices and possible supply disruptions.
The minutes flagged that:
- Higher oil and gas prices could further erode real incomes and lift production costs across the euro area.
- An extended or intensified conflict could prolong the energy shock beyond what current futures prices suggest.
- It is still too early to fully assess the macroeconomic impact, making policy flexibility essential.
Revised staff projections now see headline inflation averaging 2.6% in 2026, before easing to 2% in 2027 and edging up slightly to 2.1% in 2028. The projections incorporate higher energy input costs and a gradual pass-through into broader price measures.
Focus on second‑round effects
The central bank’s key concern is whether the recent energy-driven rise in prices will spread more broadly through the economy.
The minutes indicate that officials will pay close attention in the coming quarters to:
- Wage negotiations and agreed pay rises
- Corporate pricing behavior
- Household inflation expectations
- Any renewed supply-chain disruptions
Members warned that the experience of the 2022 inflation spike could cause firms and workers to respond more quickly if energy prices stay elevated, potentially amplifying second‑round effects.
So far, wage indicators offer some reassurance. The ECB’s own wage tracker points to negotiated wage growth moderating to around 2.6% by the end of 2026, giving the Governing Council additional room to wait before considering a more restrictive stance.
Different backdrop from 2022
Despite the recent jump in energy prices, officials emphasized that current conditions differ from those during the last major inflation surge:
- Overall inflation is now close to the ECB’s 2% target.
- Long-term inflation expectations remain well anchored.
- Demand momentum is weaker than during the 2022 spike.
This backdrop underpins the decision not to signal further tightening for now, while remaining alert to any persistence in energy-driven inflation.
Latest inflation data confirm energy pressures
The concerns in the minutes are already visible in the latest euro area data. Annual inflation accelerated to 2.6% in March from 1.9% in February, partly driven by a 5.1% year‑on‑year rise in energy prices after a prolonged period of declines. The March reading was revised up from an initial estimate of 2.5%, confirming that energy-related price pressures are feeding into headline inflation.
Whether those pressures spread more broadly will determine the ECB’s next steps. Any sustained acceleration in prices or wages could prompt a faster policy response, the minutes suggest, while a temporary spike with contained second‑round effects might allow rates to stay on hold.
Global energy outlook deepens uncertainty
The energy outlook itself is highly uncertain. The U.S. Energy Information Administration recently raised its 2026 forecast for Brent crude to an average of $96 per barrel, and sees prices potentially peaking near $115 in the second quarter. Some private-sector analyses foresee lower levels, underlining the wide range of scenarios the ECB must factor into its decisions.
Any disruption to supply routes, including through the Strait of Hormuz, could trigger rapid reassessments of both the inflation and growth outlook for the euro area.
Limited market reaction, focus shifts to data
Market reaction to the minutes was muted. The euro slipped 0.14% on Thursday, with the EUR/USD pair trading near 1.1780.
For traders, the message is a period of elevated data sensitivity. Upcoming releases on:
- Wage settlements
- Consumer price indices
- Producer prices
- Energy market developments
are likely to play a decisive role in shaping expectations for future ECB moves and, in turn, guide near-term market direction. The central bank’s stance remains one of patience, but with a clear warning that persistent energy costs or accelerating wages could force a swift policy rethink.
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