The European Central Bank (ECB) maintained its interest rates unchanged in March, as revealed in the meeting accounts released Thursday, reflecting a cautious stance amid heightened uncertainty stemming from the ongoing war in the Middle East [1]. Policymakers emphasized that it is too early to determine the full macroeconomic consequences of the conflict, highlighting upside risks to inflation and downside risks to growth, primarily through higher oil and gas prices, potential supply disruptions, and negative impacts on real incomes [1]. The ECB's March staff projections now forecast headline inflation averaging 2.6% in 2026, 2% in 2027, and 2.1% in 2028, with the upward revision for 2026 mainly attributed to higher energy prices [1]. Underlying inflation was also revised slightly higher, suggesting the ECB is wary of broader inflationary spillovers [1].
Recent Eurozone inflation data supports this cautious approach, with the Harmonized Index of Consumer Prices (HICP) rising 1.3% month-on-month in March (up from 0.6% in February) and annual inflation revised higher to 2.6%, the highest since July 2024 [5]. Core inflation, however, eased to 2.3% year-on-year from 2.4% previously [5]. Despite the inflation uptick, ECB President Christine Lagarde has stressed the need for agility and a data-dependent approach, with no explicit bias toward tightening [3][5]. Governing Council members, including François Villeroy de Galhau and Isabel Schnabel, have echoed the call for more data before acting, citing risks from volatile oil prices and potential negative effects on demand and growth [3].
Financial markets currently price in two 25-basis-point ECB rate hikes later in 2026, with the first hike expected by June, though the probability of a move at the April meeting remains limited [3][5]. According to MUFG, both the euro and pound have fully recovered their initial losses against the US dollar since the Middle East conflict, supported by falling European energy prices and hawkish rhetoric from both the ECB and Bank of England [2]. However, there has been some backtracking from both central banks, indicating a preference to wait and assess the fallout from the energy price shock before hiking rates [2].
On the US side, New York Fed President John Williams expressed concerns that the Iran war is already contributing to higher prices and slower growth, with supply chain pressures at their highest since early 2023 [6]. Williams noted that if energy supply disruptions ease, prices should come down later in the year, but warned of the risk of stagflation if the conflict persists [6]. The Federal Open Market Committee kept its benchmark rate at 3.5%-3.75% in March, with markets expecting no cuts this year and a 100% probability of holding steady at the April meeting [6].
Market reactions have been mixed. The EUR/JPY edged lower by 0.15% on Thursday, trading near 187.30, as traders digested the higher inflation data and awaited further ECB signals [5]. The euro was the strongest against the New Zealand dollar among major currencies [5]. ING notes that while risk assets are rallying and the US dollar is softer, conditions for a sustained dollar decline are not yet in place due to stable US rates and lingering global growth headwinds [4].
CONCLUSION
The ECB is maintaining a cautious, data-dependent stance in response to rising inflation and ongoing geopolitical risks, with markets expecting rate hikes later in the year but not imminently. Both European and US central banks are prioritizing flexibility amid uncertainty, and while markets have stabilized, the outlook remains highly sensitive to developments in energy prices and the Middle East conflict.