After the Federal Reserve and the Bank of England, also the European Central Bank unanimously decides to leave rates unchanged and warns: “The conflict in Iran will have a significant impact on inflation in the short term through increases in energy prices,” Frankfurt writes in black and white.
So no surprises from Frankfurt. The deposit rate therefore remains at 2%., the rate on main refinancing operations at 2,15% and the rate on marginal lending at 2,40%.
Lagarde raises the alarm: "War poses upside risks for inflation and downside risks for growth."
“The war in the Middle East has made the outlook significantly more uncertain, generating upside risks to inflation e downside risks to economic growth", said ECB President Christine Lagarde in her usual monthly press conference. In the short term, inflation will rise due to theincrease in energy commodity prices, while “The implications for medium-term inflation – explained Lagarde – depend crucially on the size of the indirect and second-round effects of a stronger and more persistent energy shock”.
"The Board of Directors is well positioned to address this uncertainty,” the statement explains. “Inflation has remained around the 2% target, long-term inflation expectations are firmly anchored, and the economy has shown good resilience in recent quarters.” However, the ECB remains alert: “The information the Governing Council will acquire in the coming period will allow it to assess the impact of the conflict on the inflation outlook and the associated risks. The Governing Council is closely monitoring the situation and will tailor monetary policy appropriately through its data-driven approach.”
And as for today's decision, “we had a professor of defense and military affairs which he informed us the day before the Governing Council meeting,” Lagarde said, clarifying that the objective “was to ensure that the governors started from the best possible information base to conduct their in-depth discussion.”
The ECB's new projections: inflation revised upward and growth down
Frankfurt also published new macroeconomic projections, based on available information.until March 11th. The estimates therefore take into account the initial impact of the war, which broke out on February 28 with the bombing of Iran by the US and Israel.
According to the baseline scenario, inflation overall inflation would average 2,6% in 2026, 2,0% in 2027 and 2,1% in 2028”, all percentages up compared to the December projections, when the ECB expected inflation to be 1,9% in 2026, 1,8% in 2027 and 2% in 2028.core inflation would average 2,3% in 2026, 2,2% in 2027 and 2,1% in 2028. In December, expectations had been for +2,2% this year, +1,9% in 2027 and +2% in 2028 respectively.
“A prolonged disruption to oil and gas supplies would lead to higher inflation and lower growth than the baseline projections,” Lagarde clarified, however.
Turning to the economy, in the new baseline scenario growth This year's forecast stands at 0,9%, down from 1,2% indicated in December. The estimate for 2027, previously at 1,4%, has dropped to 1,3%, and that for 2028 remains at 1,4%. This downward revision "results from the global effects that the war will have on commodity markets, real incomes, and confidence," the ECB statement reads.
Lagarde: "We've learned the lesson of 2022."
"From 2022 to today, four years later, I would describe our current position with two characteristics. One is that I think we are well positioned, and I would define it as three times two, that is: inflation at 2% around the medium-term target, inflation expectations at 2% over the medium term, and interest rates at 2%. This, you know, leads me to say that we are starting from a good position. And we are well positioned to demonstrate our ability to implement our strategy and be agile." These were Lagarde's words, responding to the question of whether the ECB has absorbed the lessons of 2022, when it was too slow to react to the price surge, which it long considered transitory.
We are determined to ensure that inflation stabilizes at 2% over the medium term. This is our commitment. When I also say that we are well equipped, I think that, you know, in these four years we have learnedWe've improved our models. We've changed our strategy. And we are now, in particular, more attentive to risks that surround the outlook. So I'd say this allows us to better understand and make more effective decisions." "Compared to 2022," he concluded, "it should also be emphasized that four years ago inflation was already at 6%, so a big difference."
Lagarde: "It is urgent to strengthen the eurozone and reduce dependence on fossil fuels."
“In the current geopolitical landscape, the Governing Council underlines the urgent need to strengthen the euro area and its economy,” said the ECB president, defining as “crucial importance” the promotion of a “greater integration of capital markets, completing the union of savings and investments and the banking union, according to an ambitious roadmap, as well as rapidly adopting the regulation establishing thedigital euro".
Lagarde also specified that "any fiscal response to the energy price shock should be temporary, targeted, and calibrated. The current energy crisis underscores the imperative to further reduce dependence on fossil fuels."
BoE "ready to act" against inflation. Rates also held steady in London.
Resta also firm for the Bank of England, which unanimously decided to leave the reference interest rate unchanged at 3,75%, saying “ready to act” to counter any inflationary surge triggered by the war in the Middle East. This is thefirst decision without dissent in four and a half years.
“The war in the Middle East has pushed up energy prices globally,” said the governor of the Bank of England. Andrew Bailey. “This is already visible at the pump and, if it continues, will contribute to higher energy bills for households this year,” he added.
In its note, the BoE underlines that, although previously there had been a continuous disinflation of prices and wages, CPI inflation will be higher in the short term following this new economic shock. "Monetary policy cannot influence global energy prices, but it aims to ensure that the economic adjustment to prices occurs in a way that achieves the 2% target sustainably. We are alert to the growing risk of domestic inflationary pressures through second-order effects on wage and price setting, the risk of which will be greater the longer high energy prices persist. We are assessing the inflation implications ofweakening of economic activity which is likely to arise from rising energy costs,” the Bank of England said.
