ECB leaves rates on hold as expected; Not pre-committing to a particular rate path, is well positioned to navigate this uncertainty

• Not pre-committing to a particular rate path
• Interest rate decisions will be based on… inflation outlook and the risks surrounding it… dynamics of underlying inflation and the strength of monetary policy transmission
• Will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance
• The Governing Council is well positioned to navigate this uncertainty
• Implications for medium-term inflation depend crucially on the magnitude of indirect and second-round effects of a stronger and more persistent energy shock
• “Closely monitoring the situation”; data-dependent approach will guide setting monetary policy as appropriate
• Incoming information… will help the Governing Council assess how the war will affect the inflation outlook and the risks surrounding it
• War in the Middle East has made the outlook significantly more uncertain, creating upside risks for inflation and downside risks for economic growth
• Will have a material impact on near-term inflation through higher energy prices; medium-term implications depend on intensity and duration of conflict and transmission to consumer prices
• Determined to ensure that inflation stabilises at the 2% target in the medium term

Baseline forecasts

• Growth seen at 0.9% in 2026, 1.3% in 2027, 1.4% in 2028; downward revision, especially for 2026, reflecting global effects of the war
• Inflation excluding energy and food seen at 2.3% in 2026, 2.2% in 2027, 2.1% in 2028; higher than December path due to energy pass-through
• Staff project headline inflation at 2.6% in 2026, 2.0% in 2027, 2.1% in 2028; revised up, especially for 2026, due to higher energy prices

Scenario Analysis

• Staff also assessed how the war in the Middle East could affect economic growth and inflation under some alternative illustrative scenarios.
• The scenario analysis suggests that a prolonged disruption in the supply of oil and gas would result in inflation being above, and growth being below, the baseline projections.
• The implications for medium-term inflation depend crucially on the magnitude of indirect and second-round effects of a stronger and more persistent energy shock.

APP

• APP and PEPP portfolios “declining at a measured and predictable pace” as principal reinvestments have ceased

TPI

• Stands ready to adjust all of its instruments” to ensure inflation returns to target; Transmission Protection Instrument available to counter disorderly market dynamics and preserve transmission