Key Takeaways
- Market sentiment on future rate cuts has shifted drastically since oil and gas prices surged following the Iran War, with markets now pricing in up to two rate hikes over the remainder of 2026.
- Inflation in the eurozone is set to be higher.
- Growth forecasts are being revised lower due to rising energy prices.
The European Central Bank is expected to hold interest rates steady on March 19, despite fears of rising inflation in the eurozone following a surge in oil and natural gas prices.
Sentiment has shifted considerably since Israeli-US attacks on Iran rattled global energy markets, with expectations for ECB rate cuts giving way to bets on rate hikes in 2026.
Futures markets, which reflect investors’ expectations for future central bank policy rates in real time, now price in one to two 25-basis-point hikes through the remainder of 2026.
“The ECB is likely to remain on hold at its meeting next week,” says Grant Slade, Morningstar’s international economist.
He believes financial markets have greatly overreacted. “We don’t think the Middle East conflict markedly alters the outlook for eurozone policy rates in 2026, assuming the conflict remains relatively short-lived.”
A further interest rate cut in late 2026 could still occur as the Middle East inflationary impulse dissipates over the next two to three quarters, he adds.
Economists Expect the ECB to Hold Rates in March
Carsten Brzeski, global head of macro at ING expects the ECB to hold rates next week.
“The discussion about further rate cuts has largely come to an end,” he says.
“By the time the ECB meets on March 19, the macro backdrop will have shifted markedly since the last meeting. With the conflict in the Middle East, the risk of inflation undershooting—and any discussion of further rate cuts—should be firmly off the table,” Brzeski adds.
With Brent crude oil prices up about 54% and benchmark European TTF gas prices up roughly 61% since the attacks began on Feb. 28, analysts have reassessed the potential impact on eurozone inflation and economic growth.
ECB to Release Updated Eurozone Inflation and Growth Forecasts
ECB staff will also provide a fresh set of quarterly macroeconomic projections at the March meeting.
“Even if the current oil price shock were short-lived, it would still affect inflation with a delay—for example through supply chains or higher gas prices for consumers in the winter,” Brzeski says.
“It’s time for a panic room in the ECB’s ‘good place’,” he added, referring to ECB president Christine Lagarde’s reiterated comments that inflation is “in a good place.”
“The main takeaway from the governing council meeting will likely be that the situation is too uncertain. As long as the economy does not deteriorate significantly, there are strong arguments for keeping rates unchanged for the time being. The ECB’s second most important tool is words. And that is precisely the tool it will use next week. The key question will be whether the ECB’s language changes,” according to Brzeski.
Next week will be a busy week for central bankers, with the US Federal Reserve deciding on rates on Wednesday and the Swiss National Bank, Bank of England, Swedish Riksbank and the ECB following on Thursday.
What Are the Key ECB Interest Rates?
The first ECB rate cut came in June 2024 and a total of eight rate cuts have taken the deposit facility rate from 4.00% to the current level of 2.00%. Since June 11, 2025, the ECB’s three policy rates stand at:
- Deposit Facility Rate: 2.00%
- Main Refinancing Rate: 2.15%
- Marginal Lending Facility: 2.40%
Energy Price Surge Sparks New Eurozone Inflation Concerns
Assuming the conflict remains relatively short-lived, energy prices are likely to recede in the second half 2026, says Morningstar’s Slade. “But inflation will still prove resurgent in coming quarters as the energy price spike works its way through the headline HICP inflation rate. Consequently, we could see a somewhat more cautious ECB at monetary policy meetings between now and the autumn.”
The US dollar has strongly strengthened against the euro, reversing the narrative of a strong euro that would contain imported inflation in the eurozone. The common currency traded at USD 1.1778 before the attacks and has since dropped to USD 1.1457, making imports—including energy—more expensive for buyers in the eurozone.
“Against the backdrop of rising energy prices, inflation risks have increased significantly—especially as the higher cost of living of recent years has become firmly embedded in consumers’ minds,” says Ulrike Kastens, senior economist at DWS.
“After all, it took five years for the real wage losses accumulated since the start of the pandemic to be largely made up. In particular, given the still-tight labor market and companies’ ability to raise prices, the risk of second-round effects has increased,” she adds.
“Nevertheless, a knee-jerk reaction from the ECB is unlikely; it would take more than just one bad inflation print in March,” according to Kastens.
European Growth Outlook Deteriorates
ING’s Brzeski says data on economic growth is currently very inconclusive. “Recent surveys have been fairly positive, while the hard data—especially from Germany—have been rather disappointing.”
Deutsche Bank cut its forecast for the German economy in 2026 from 1.5% to 1.0%, saying the surge in energy prices and geopolitical uncertainty is poised to counteract the growth impulse from a large-scale fiscal expansion.
“It will weigh on Germany’s trade balance, dampen consumer spending, and exacerbate existing competitiveness challenges for German industry,” according to the research note.
According to the Ifo Institute, in an escalation scenario, the war’s drag on German economic growth amounts to a cumulative 0.8 percentage points over this year and next compared with the prewar scenario.
Growth in the eurozone could drop by 0.2 percentage points in 2026 if the impact of the conflict persists, according to the UK-based National Institute of Economic and Social Research.
Will the ECB Cut Rates in 2026?
DWS’ Kastens 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 says.
“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.
ING’s Brzeski adds: “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.”
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
