In line with expectations, and money market pricing, the ECB’s Governing Council held all policy settings steady at the conclusion of the March policy meeting.

As a result, the deposit rate was maintained at 2.00%, the level at which it has stood since last June, when the easing cycle came to an end.

Accompanying the decision to stand pat, was a policy statement that reflected how significantly the economic outlook has shifted since the February confab, in light of the energy price shock triggered by conflict in the Middle East. In light of this, the statement noted that the ongoing war poses upside risks to inflation, and downside risks to growth, in the short-term.

Despite those tweaks, the Governing Council’s familiar forward guidance was maintained, with policymakers repeating that a ‘meeting-by-meeting’ and ‘data-dependent’ approach will continue to be followed, with no ‘pre-commitment’ being made to a particular policy path.

The latest round of staff macroeconomic projections was also revised to take account of the aforementioned geopolitical developments. Note, however, that the cut-off date for market-based assumptions was in mid-February, hence does not take full account of the moves in energy prices since conflict actually broke out.

Regardless, on inflation, headline CPI is now seen at 2.6% this year, up from the 1.9% expectation in December. That ‘hump’ in price pressures is likely to be short-lived, however, with HICP then seen returning to the 2.0% target in both 2027, and 2028.

Meanwhile, in terms of GDP growth, the ECB staff cut the 2026 GDP projection by 0.3pp, now pencilling in growth of 0.9% this year, though expectations further out the forecast horizon were largely unchanged. 

Turning to the post-meeting press conference, President Lagarde, having repeated the policy statement verbatim, stressed that the ECB’s focus is on longer-term inflation expectations, while also noting that risks to growth are tilted to the downside. Lagarde further confirmed that the decision today was unanimous, and that policy is ‘well-positioned’ moving forwards.

On the whole, this appears to be an ECB that is now firmly in ‘wait and see’ mode. While risks to the near-term inflation outlook tilt clearly to the upside, such an impulse is likely to be temporary, with the potential for second-round effects limited.

Consequently, the base case remains that the ECB will stand pat on policy for the foreseeable future, while remaining alert to the potential of inflation expectations becoming unanchored in the event of a prolonged energy shock. While the next policy shift is likely to be a hike, such a move is unlikely to come until the tail end of next year, and potentially later if the commodity shock leads to a significant downside demand hit.