ECB Holds Rates, War Fuels Eurozone Inflation Fears

This decision came amidst fears that the Middle East conflict would trigger an inflationary resurgence across the euro area, reminiscent of the energy price shock from Russia’s 2022 invasion of Ukraine. Global energy prices have soared, with gas prices doubling and oil up by 60% since the Iran conflict began on February 28, according to the article.

This geopolitical tension has also led to surging European government borrowing costs and a weakening euro, intensifying concerns about Europe’s long-term growth prospects. Markets now price in one or two ECB rate hikes in 2026, a significant shift from pre-war expectations of a possible rate cut.

ECB President Christine Lagarde stated the Governing Council's decision was unanimous and reiterated the bank is "well positioned" to manage potential price rises, maintaining a "data-dependent" approach. Eurozone inflation rose to 1.9% in February, up from 1.7% in January, while core inflation increased from 2.2% to 2.4%.

The ECB's output expansion forecast for 2026 was cut to 0.9%, down 0.3 percentage points from its December projection.