Even if staff burned the midnight oil to include the latest indicators, current forecasts could already be outdated. (Photo: Culp)

- Staff forecasts: Less growth, more inflation

- Conflict adding upside risks to prices

- Outlook “significantly more uncertain”

By Eric Culp

European Editor, LiveSquawk News
@eculp.bsky.social

@EricCulpLS

19 March 2026 | 16:00 GMT

FRANKFURT – Eurozone central bankers once again held their key interest rates at levels set last June, but the next steps for monetary policy are much more unclear as fighting continues in and around the Persian Gulf.

On Thursday, the European Central Bank decided to stay the course for a sixth straight meeting, as predicted by economists. Officials left their benchmark discount rate at 2%, a repeat of previous policy that followed similar decisions this week to stay the course by central banks in Canada, the US, the UK, Switzerland, and Norway.

Headline annual inflation in the Eurozone remains near the ECB’s target range of 2% over the medium term. It rose unexpectedly to 1.9% last month from 1.7% in January, which prompted some commentators to suggest the bank could take a more hawkish stance this week. As the Iran war drives oil and LNG prices to multi-year highs, the hawks are circling, but the doves could still have a say as economic concerns have also become more salient.

The first of what are likely to be many more ECB scenarios.

Scenario generator running full out

The bank’s March forecasts offered an example of the gravity of the current situation, with ECB President Christine Lagarde lauding staff for putting in extra work so information up to March 11 could be included in the projections, a week later than normal (See graphic).

After less than three weeks of war, the bank is already saying its baseline expectation for headline inflation this year is 2.6%, more than a half point higher than the December forecast. The outlook for next year increased three-tenths to 2.1%, a level that is to extend into 2028, according to the bank. Core inflation forecasts were up a tenth at 2.3% for this year, three-tenths higher at 2.2% next year, and a tenth higher at 2% for 2028.

The baseline revisions for growth included a three-tenth reduction to 0.9% this year, a one-tenth reduction for next year, and an unchanged reading of 1.4% in 2028.

But these are just the starting points. The “adverse” and “severe” scenarios offer eye-watering prospects like headline inflation at nearly more than 6.3% in Q1 of 2027 and growth with a flatness approaching pancake territory.

Even worse, some observers suggested that these numbers have already been overtaken by events: “Unfortunately for the ECB, and despite the staff's best efforts to use a later-than-usual cut-off date, their baseline scenario looks instantly obsolete,” wrote Pictet’s Frederik Ducrozet in a post on X. “Market pricing for inflation is already consistent with the adverse scenarios. The main question is about indirect effects.”

And in the run up to Thursday’s rate decision, traders have been increasing their bets on ECB rate hikes. Their expectations started Wednesday morning with at least one rate increase and perhaps a second. Just a day later after Thursday’s announcements, they were at more than two 25-basis point hikes this year.

Dealing with it

Amid the paradigm shifts in geopolitics, Lagarde said the bank is ready. “We are both well-positioned and well-equipped to deal with a major shock that is unfolding.”

Of course, this means the public lender is no longer in its “good place.” Next up, more vigilance, with, according to Lagarde, particular attention to be paid to commodity markets, supply bottlenecks, pricing expectations of firms, demand indicators, and wage trackers. That’s a full plate, and now includes a warning from QatarEnergy, whose CEO told Reuters on Thursday that the company could declare forces majures on long-term LNG contracts with Italy, Belgium, South Korea, and China. The effects of changes like these are likely difficult to calculate.

Lagarde said Thursday’s decision on unchanged rates was unanimous, and she spent much of the press conference talking about how the bank is ready for the eventualities of the conflict, and how lessons from the 2022 inflation spike can be applied to the current situation.

But then the journalists’ briefing came to an abrupt end: Lagarde seemed to be in a hurry to catch a plane to Brussels for an EU summit, the agenda of which was recently expanded to include the war and its impacts on Europe.

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