ECB alert – Lagarde: War brings new shock, outlook extremely uncertain, inflation at 2.6% in 2026

The European Central Bank has kept interest rates unchanged at 2%, confirming the wait-and-see stance of the world's major central banks amid increased geopolitical uncertainty and an alert over the consequences of the energy shock on the economy and inflation, in the shadow of the escalating conflict in the Middle East. ECB President Christine Lagarde announced that the war in the Middle East has caused a major ongoing shock and has rendered economic prospects "much more uncertain," emphasizing that a short-term rise in inflation is expected due to the increase in oil prices.

The war in the Middle East has significantly intensified uncertainty surrounding the economic outlook, simultaneously creating upside risks for inflation and downward pressure on growth, the ECB president noted. A prolonged disruption in the supply of oil and gas would lead to higher inflation and lower growth compared to the baseline scenario, Lagarde warned. "Inflation will rise above 2% in the immediate future. Any fiscal response to the energy crisis caused by the war in Iran must be temporary, targeted, and tailored to the circumstances," the ECB president stressed.

Duration of the conflict a decisive factor

As she underlined, the path of the economy and inflation will depend largely on the duration of the conflict, leaving open the possibility of new pressures if the crisis is prolonged. Lagarde's position confirms that European monetary policy is entering a phase of increased caution, with developments in the Middle East now serving as a key factor for ECB decisions.

However, despite the increased uncertainty, the ECB estimates that the economic environment remains manageable. Inflation is moving close to the 2% target, long-term expectations remain stable, and the eurozone economy has demonstrated resilience. Lagarde stressed that strengthening the Eurozone economy is necessary "while maintaining healthy public finances," including the completion of the Capital Markets Union and the transition away from fossil fuels.

Inflation at 2.6% in 2026

In this light, the ECB revised its inflation forecasts higher, taking into account data collected up to March 11. Inflation is expected to stand at 2.6% in 2026, 2% in 2027, and 2.1% in 2028, higher than December forecasts due to increased energy prices. Excluding volatile categories of energy and food, core inflation is expected to be 2.3% in 2026, 2.2% in 2027, and 2.1% in 2028.

The ECB's decision for unchanged rates

The Governing Council of the European Central Bank decided today to keep the three key Eurozone interest rates unchanged, reaffirming its commitment to returning inflation to the medium-term target of 2%. In its announcement, the Governing Council underlines that the war in the Middle East has significantly intensified uncertainty around the economic outlook, creating both upside risks to inflation and downside pressures on growth.

Specific reference is made to the immediate impact on energy prices, which are expected to boost short-term inflation, while medium-term effects will depend on the duration and intensity of the conflict. Despite the increased uncertainty, the ECB estimates that the economic environment remains manageable. Inflation is moving near the 2% target, long-term expectations remain stable, and the eurozone economy has shown resilience in recent quarters. The Bank emphasizes that it will continue to closely monitor new economic data, adopting a "meeting-by-meeting" approach to decision-making.

Revised forecasts due to energy shock

The new macroeconomic projections by ECB experts exceptionally incorporate data up to March 11. According to the baseline scenario, headline inflation in the eurozone is expected to average 2.6% in 2026, 2.0% in 2027, and 2.1% in 2028. Compared to previous forecasts, estimates have been revised upwards, mainly for 2026, due to the rise in energy prices attributed to the war in the Middle East. Correspondingly, core inflation (excluding energy and food) is also expected to be higher, as the impact of energy prices spreads more widely through the economy.

At the same time, eurozone growth is expected to move lower than previous estimates, with forecasts of 0.9% for 2026, 1.3% for 2027, and 1.4% for 2028. The downgrade is attributed to the global impacts of the conflict, pressures on real incomes, and a decline in confidence. However, low unemployment, strong private sector balance sheets, and public investment in defense and infrastructure are expected to provide support.

Risk scenarios: Prolonged energy crisis

The ECB is also examining alternative scenarios, which will be published alongside the projections. According to these, a prolonged disruption in the supply of oil and natural gas would lead to higher inflation and lower growth compared to the baseline scenario. The Bank points out that the secondary effects of such an energy shock are decisive for the medium-term path of prices, as they could permanently affect expectations and inflation dynamics.

Monetary policy and interest rates

The rates for the deposit facility, the main refinancing operations, and the marginal lending facility remain unchanged at 2.00%, 2.15%, and 2.40% respectively. At the same time, the asset purchase programs (APP) and the pandemic emergency purchase programme (PEPP) continue to decrease at a steady and predictable pace, as amounts from maturing securities are no longer reinvested.

Constant readiness for interventions

The ECB underlines that it remains ready to adjust all its available tools, within its mandate, to ensure price stability and the smooth transmission of monetary policy across all eurozone countries. The Transmission Protection Instrument (TPI) remains available to counter unwarranted market turbulence that could threaten the functioning of monetary policy. The Bank concludes that it will continue to make decisions based on available data, without pre-commitment to the path of interest rates.

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