Europe | War fuels a hawkish outlook

Summary

The ECB’s March policy meeting was shaped by the Middle East crisis, which complicates the macro outlook. If the conflict persists, rate hikes cannot be ruled out, in an environment of elevated uncertainty and a firmly data-dependent policy stance.

Key points

• Key points:
• The ECB kept rates unchanged, with Lagarde framing policy as “well positioned” to deal with the energy shock.
• In this energy shock, Lagarde stressed that persistence and second-round effects, rather than the initial price spike, will determine the policy response.
• The ECB’s new baseline revises inflation up and growth down, with two more scenarios adding an upside bias to inflation via market-implied oil prices and persistent shocks.

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