The European Central Bank (ECB) held its three key interest rates for the eurozone steady in its March monetary policy decision, continuing its current wait-and-see stance amid tight policy. The core objective remains ensuring a stable decline of medium-term inflation back to the 2% policy target, while confronting economic uncertainties stemming from the situation in the Middle East.
Key interest rates were left unchanged, reflecting a cautious policy posture. The ECB made no adjustments to its key rates, with the deposit facility rate, main refinancing operations rate, and marginal lending facility rate held at 2.00%, 2.15%, and 2.40%, respectively, aligning with broad market expectations. The ECB clearly stated it will adhere to a data-dependent, meeting-by-meeting approach to decision-making, avoiding pre-commitment to a specific interest rate path. Future rate adjustments will be comprehensively assessed based on the inflation outlook, core inflation dynamics, economic and financial data, and the effectiveness of monetary policy transmission.
The Asset Purchase Programme (APP) and the Pandemic Emergency Purchase Programme (PEPP) continue to reduce the balance sheet steadily. The Eurosystem is no longer reinvesting principal payments from maturing securities, allowing the asset portfolio to shrink at a measured and predictable pace, maintaining the established rhythm of monetary policy normalization. The ECB also emphasized that the Transmission Protection Instrument (TPI) remains available and can be activated to counter disorderly market conditions, ensuring smooth monetary policy transmission across the euro area.
The Middle East situation was highlighted as a major source of uncertainty, introducing dual risks of higher inflation and lower growth. The tensions are directly driving up energy prices and significantly increasing uncertainty regarding the economic outlook. This creates a dual-risk scenario of upward pressure on inflation and downward pressure on economic growth. Short-term inflation has already been materially affected by rising energy prices, while the medium-term impact will depend on the duration and intensity of the conflict and the pass-through effects on energy prices.
The ECB pointed out that, as of March 11th, core projections have shown significant revisions compared to the December 2025 forecasts. Inflation projections have been revised upwards across the board. Under the baseline scenario, overall inflation is projected to be 2.6% in 2026, decline to 2.0% in 2027, and edge up to 2.1% in 2028. Core inflation, excluding energy and food, is projected at 2.3%, 2.2%, and 2.1% for 2026 through 2028, respectively. The upward revisions are primarily due to the Middle East situation pushing energy prices higher, with effects transmitting to core inflation.
Conversely, growth expectations have been downgraded. Eurozone economic growth is now projected at just 0.9% in 2026, rebounding to 1.3% in 2027, and rising slightly to 1.4% in 2028. The significant downward revision for 2026 is mainly attributed to the conflict's impact on commodity markets, real household income, and market confidence. However, low unemployment, robust private sector balance sheets, and public spending on defense and infrastructure are expected to continue supporting economic growth.
Analysis indicates that if the Middle East situation leads to prolonged disruptions in oil and gas supplies, eurozone inflation would be higher than the baseline projection, while economic growth would be lower than expected. The medium-term path of inflation will crucially depend on the indirect effects of the energy shock and the strength of second-round effects.
The ECB stated that it stands fully prepared to address the current uncertainties. It will monitor developments in the Middle East closely and is ready to adjust all instruments within its mandate as necessary to ensure that inflation returns to the 2% target over the medium term.