European Central Bank policymakers expressed caution last month regarding premature interest rate increases, amidst growing fears of a new energy-driven surge in euro zone inflation. Accounts from the March 18-19 meeting, where the ECB maintained its key interest rate at 2%, revealed an inclination to keep rates steady again this month. Policymakers judged they lacked sufficient evidence to conclude that the ongoing Iran war would sustainably elevate inflation across the bloc.
The central bank’s baseline projections, released during the March meeting, anticipated that the impact from the Iran war would be short-lived. However, these forecasts were accompanied by adverse and severe scenarios that modelled a sharper rise in energy prices, heightened uncertainty, and international spillover effects. The ECB indicated that “incoming data could then be monitored to assess which scenario seemed to be crystallising, thereby facilitating swift policy action if necessary,” while stressing the importance of not acting prematurely. Carsten Brzeski, ING’s global head of macro, observed that the accounts portrayed the ECB as “hawkish” but “in no hurry to react.”
Policymakers had hoped to gain more clarity regarding the duration and extent of the conflict by their subsequent April 29-30 meeting, yet conceded it might still be too early to definitively conclude the implications for inflation. They highlighted a range of key factors under close scrutiny, including inflation expectations, selling prices, company profits, labour market data, underlying inflation figures, and potential supply chain disruptions. ECB President Christine Lagarde has since affirmed that the central bank would respond forcefully or persistently if inflation appeared set to significantly exceed its 2% target over an extended period, noting even a modest overshoot could warrant a “measured” rate adjustment.
