Key Takeaways
- The ECB held its key interest rate steady at 2% for a sixth consecutive meeting.
- The inflation outlook was revised up as war in the Middle East will have “material impact on near-term inflation.”
- Markets are now pricing in one to two rate hikes in the course of 2026 amid resurging inflation fears as oil prices rise.
The European Central Bank kept its key interest rate unchanged at 2% on Thursday, as expected, amid fears of rising inflation in the eurozone following a surge in oil and natural gas prices linked to the war in the Middle East. This marks the sixth consecutive meeting where a rate-cutting cycle that began in June 2024 remained on hold.
“The war in the Middle East has made the outlook significantly more uncertain, creating upside risks for inflation and downside risks for economic growth,” the ECB said in its press release, marking a shift from previous wording. “It will have a material impact on near-term inflation through higher energy prices. Its medium-term implications will depend both on the intensity and duration of the conflict and on how energy prices affect consumer prices and the economy.”
Stock and bond markets’ reaction was muted as the rate decision had been widely expected. Stocks and bonds had been under pressure as inflation fears and growth concerns mounted.
Sentiment has shifted considerably since US-Israeli attacks on Iran rattled global energy markets, with expectations for ECB rate cuts giving way to bets on rate hikes in 2026 as inflation fears mount.
“Interest rate setting had become relatively boring until just a few weeks ago. Now, with the price of a barrel of oil spiking to USD 115, everything has turned on its head,” said Michael Field, Morningstar’s chief European markets strategist.
“Equity markets had originally expected flat rates in 2026, or even the possibility of rate cuts at some point. Right now, they are scrambling to re-price to the new environment, given the possibility of interest rate hikes if the effects of the conflict spill over to inflation numbers. How quickly things change,” he added.
The ECB’s decision comes in a week packed with major central bank meetings. The US Federal Reserve and the Bank of Canada held rates steady on March 18. On Thursday, the Swiss National Bank, the Bank of England, Sweden’s Riksbank, the Bank of Japan, and the ECB also left their main rates unchanged.
ECB Rate Decision March 2026
Since June 11, 2025, the three ECB key interest rates have been:
- Deposit rate: 2.00%
- Main refinancing rate: 2.15%
- Marginal lending facility: 2.40%
The ECB Raised its Inflation Outlook
ECB staff have revised their economic forecasts. They now see headline inflation averaging:
- 2.6% in 2026 (up from 1.9%)
- 2.0 %in 2027 (up from 1.8%)
- 2.1 % in 2028 (up from 2.0%)
For core inflation, which excludes energy and food, ECB staff project an average of 2.3% in 2026, 2.2% in 2027 and 2.1% in 2028. This compares to December projections of 2.2% in 2026, 1.9% in 2027, and 2.0% in 2028.
The revised projections suggest that inflation is likely to remain more persistent than previously expected, supporting the case for the ECB to keep its policy unchanged for longer.
Consumer prices in the eurozone increased by 1.9% year over year in February, according to Eurostat, up from January’s reading of 1.7% and higher than consensus estimates. The rate is just below the European Central Bank’s 2% target.
ECB Revises Down Growth Forecast
ECB staff changed their economic growth projections for the eurozone to:
- 0.9 % in 2026 (down from 1.2% in its December forecast)
- 1.3 % in 2027 (down from 1.4%)
- 1.4 % in 2028 (unchanged)
Bond Yields Rise As Rate Outlook Shifts
The global market selloff following the outbreak of the Iran war has pushed eurozone bond prices lower as the outlook for interest rates and inflation has shifted sharply. When yields on bonds rise, their prices fall because investors demand higher compensation for lending.
“The Iran war and the resulting spike in oil prices have driven 10-year German Bund yields to their highest level since late 2023,” said Shannon Kirwin, principal for fixed income at Morningstar. Bunds are generally considered the eurozone’s benchmark government bonds. “The most recent Bund auction saw weak demand, worries about stagflation have grown - though most still see that as a tail-risk scenario - and markets have gone from expecting the ECB to keep rates steady to now pricing in one or two hikes by year-end,” she said.
“On the one hand, you could argue that current 10-year Bund yields near 3% offer the most attractive entry point in over two years - but that would ignore the significant risk of further weakness, particularly if the energy disruption persists,” she added.
Will the ECB Cut Rates in 2026?
Ulrike Kastens, senior economist at DWS says she expects the ECB’s deposit rate to remain unchanged at 2.0% in the coming months. “If necessary, however, the ECB would likely act more quickly today than it did in 2022 in order to counter rising inflation expectations at an early stage,” she said.
“The decisive factor will be how long the war with Iran lasts and how long it continues to cause significant disruptions in energy markets. As there is no simple answer to that question, it will be all the more important for ECB president Christine Lagarde to make it clear that the surge in inflation seen in 2022 and 2023 will not be repeated. Rate hikes are therefore becoming more likely, while rate cuts are off the table,” according to Kastens.
Carsten Brzeski, global head of macro at ING, said: “If the Strait of Hormuz were blocked for several months and oil prices rose to USD 110 to USD 120 per barrel, I could imagine the ECB raising interest rates once or twice this year.”
“Should the ECB decide to tighten later this year, we do not expect hikes beyond what markets already price in,” said Konstantin Veit, portfolio manager at Pimco.
When Are the ECB Meetings in 2026?
- April 30, 2026
- June 11, 2026
- July 23, 2026
- Sept. 10, 2026
- Oct. 29, 2026
- Dec. 17, 2026
