Publications

The ECB responded to the worsening inflation outlook with a 25bp rate hike, but kept all options open for the months ahead. The key message was that the shock can no longer be viewed as temporary, although there is still no clear evidence of second-round effects.

The risk of a financial crisis stemming from private credit in Europe is low for now, according to the ECB. This market remains small, and banks’ exposure is residual. However, other risks are being flagged, such as the conflict in the Middle East and its potential second-round effects.

Overall, the ECB delivered as expected, pausing to assess incoming data and the evolution of the war and energy shock. The lack of clear second-round effects supports this wait-and-see stance for now, but as uncertainty persists, the likelihood of a June rate hike is increasing.

If a year ago the International Monetary Fund (IMF) meetings in Washington revolved around tariffs, this year the conflict in Iran has overshadowed that debate.

The ECB is addressing the supply shock stemming from the conflict in the Middle East by using economic scenarios. The institution is taking a watchful stance toward inflation risks and the persistence of energy prices to avoid second-round effects on the economy.

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.

The ECB has been holding its key policy interest rate at 2% for several months, with medium-term inflation forecasts close to its target and a relatively positive assessment of the European economy, which is growing near its potential rate.